NS&I Index linked savings Certificates

miken

NS&I Index linked savings Certificates are touted as a good tax free investment especially for higher rate tax payers.
Does anyone have experience of these accounts, are they competitive, worthwhile as I have used my ISA allowance for this year.

dunstonh

0.95/1.05% for the 3/5 year version above inflation is lower than what you can achieve on some savings accounts. However, with higher rate tax to take into account, you can find these to be marginally better.

ie 5% minus 40% = 3% inflation at 2.5% plus 0.95% = 3.45%

You may find low risk, low yield unit trusts/OEICs to be an option to consider.

Viz_2

I was going to use one of these for my daughters savings. I am a higher rate tax payer.
Was also looking at the childrens bond from NS & I.

Which do you think will perform better over the next 18 years ? lol

dunstonh

Crystal ball job, but i wouldnt use deposit backed savings for 18 years. I would use commercial property funds/index linked funds or stockmarket funds (or even better a combination within one investment if the amounts allow it).

Everyones view on investment risk is different though.

MJSW

dunstonh wrote:

ie 5% minus 40% = 3% inflation at 2.5% plus 0.95% = 3.45%.

RPI inflation hasn't been as low as 2.5% for quite a long time. The current rate is 3.2%. It is about two and a half years since the rate was as low as 2.5%.

I'm a huge fan of the Index Linked Certificates. For a higher rate taxpayer they are way better than most savings accounts in my opinion, as long as you are aware of the potential pitfalls. The main drawbacks are:

1) They are bonds, not instant access. Whilst you can withdraw early without any 'penalty' as such, the rates are geared so that inflation + 0.95% is just the average rate over the 3 year term. This is split 0.7% in year 1, 0.9% in year 2 and 1.26% in year 3. So if you withdraw in year 2 or part way through year 3, the average rate you get will be slightly lower than the quoted 0.95%.

Also, no interest at all is paid if you withdraw in the first year. Therefore only invest if you are fairly confident you won't need to get your hands on the money for at least 12 months!

2) Inflation could of course fall from current levels. Based on current rates of inflation the 3 year bond returns 4.15% net. That's equivalent to 6.92% gross for a higher rate taxpayer, way better than any other accounts available (with the possible exception of some of the monthly savings accounts).

However, it would need a fairly large fall before the rate fell below other savings rates, eg even if inflation falls by a full 1% from the current rates, the gross equivilent rate for a higher rate payer is still 5.25% on the 3 year or 5.42% on the 5 year.