Advice about Index-linked Savings Certificates please.

whattochoose

From reading this.....
http://www.bbc.co.uk/news/business-30095123
It appears inflation may be very low for some time.
I took out my index linked certificates in May 2011.
I'm wondering if it's possibly time to withdraw them and re-investing elsewhere?
Thank you.

sleepless_saver

http://www.nsandi.com/savings-index-linked-savings-certificates

bowlhead99

I suppose it depends what you mean by 're-investing' elsewhere. Do you mean investing in an investment product, or, as I'm guessing, just finding a cash savings account or current account that gives you a return on your cash with a better rate than the ILSCs currently pay, without risk of losing some of the capital?

There are lots of 'investment' opportunities out there (by investments, I mean stocks and shares and funds and bonds and property and so on) that can give you a real return above inflation, over a long enough time period. If you choose to use cash deposits and savings accounts, you're unlikely to achieve that. Likely, with cash, the inflation will be more than your return, given a long enough time period. Whereas conventional investments such as funds that hold company shares, will give a better return but their values will move up and down from day to day and you might not get back what you put in if you want to get out in a hurry.

Why will cash savings or deposits give you a low return that might not even equal inflation? Well think of it this way: if interest rates are low and inflation is low, why would the banks pay you high rates for an extended period of time when they have to give you 100% guarantee on the capital and cannot take any risks with your money, and need to make profits. Answer, they wouldn't - although they might have special offers from time to time where they pay a decent rate.

So, in the long run, investments can give a good return while cash savings are only likely to match inflation at best.

The ILSC is a product that will definitely match inflation, or thereabouts, while having a 100% government guarantee for the capital. So if matching inflation is generally the best you can hope for from 'safe' savings accounts over time, it stands to reason that ILSC are a very useful thing to hold, as the capital is guaranteed and the matching inflation is guaranteed. They are in so much demand and potentially so expensive for the government, that NSANDI have to restrict how much a single person can hold and are currently not offering them to anybody who doesn't already have them.

I don't have any ILSCs because I didn't get them when they were available and they are not doing any new issues, only allowing people to roll over the old issues. I would be happy to hold them if they would let me.

So, for your own situation:

- you can certainly cash them in and get a better rate in the short term if you want (for example the Santander 123 account is paying 3% on £20k at the moment, which after tax is may be higher than the next couple of year's inflation, depending on your tax rate and the actual inflation rates). If inflation stays low and Santander keep offering high interest to get new customers in, it will have been a good idea to switch.

- but at some point the promotional deals will run out, and inflation will increase again. At that point you may not be able to get back in to ILSCs if you came out of them to chase a tempting rate for a short time.

This means it's quite a personal choice whether to sell up or not.

If you will want this holding to remain cash-based with security of capital for years and years to come, probably an inflation linked product is great for you and you should keep it. But with the proviso that if you do literally intend to not touch it for years and years to come, and never need to cash it in for spending, a stock market investment may be better.

While if instead you don't think you'll be holding these for the long long term, because you're saving for your next house move or a car or a big retirement holiday or a care home in five years time, then probably there's no point keeping them and you should just cash in the ILSCs and dance around the highest paying other accounts that you can find, over those five years.

Be aware that you may have to pay an interest penalty to take your cash out before it matures, as the link above probably tells you. Whether it's worth holding to the next maturity, if you know you definitely want to exit, depends on what money you can make by going elsewhere.

kidmugsy

whattochoose wrote: »

From reading this.....
http://www.bbc.co.uk/news/business-30095123
It appears inflation may be very low for some time.
I took out my index linked certificates in May 2011.
I'm wondering if it's possibly time to withdraw them and re-investing elsewhere?

May 2011 implies that they are the old-style certificates, paying (is this right?) 0.5% p.a. above RPI, and cash-in-able at negligible penalty at the drop of a hat. If they are part of a balanced savings and investment portfolio, hold on to them. You won't be able to replace them if you don't. If they are just cash that you will want in a year's time, then you might make more interest in interest-bearing current accounts at present.

When they mature you'll need to decide whether to roll them over into the less desirable new-style certificates. Again, it will depend on your purpose in holding them.

P.S. I can't think of another heritable income-tax shelter, certainly nothing of such low risk.

Stubod

If you have these in the first place it looks like you are more interested in "savings" rather than investments. Unless you are investment savvy I would be inclined to leave them in..at least your savings will maintain pace with inflation in the short term. I have some and wished I had started putting money into them sooner as there have been no new issues for ages and none currently on the horizon. Mine are currently returning about 3% overall ...and they are tax free....best I can get otherwise is Santander which is 2.4% after tax.

InvestInPoker

I want me some of these but who knows when they will be issued again