NS&I Index linked 5-year maturity - What now?

Hopper55

Hi,
My five-year Index linked certificate matures in the next month.
My investment was the maximum £15k linked to the RPI plus 0.5% and averaged at about 3%.
The options now are to cash in, leave for a further 5 years or go for a 3-year deal, both at RPI plus 0.01%.
With the rubbish rates currently available I am thinking that if something is linked to the RPI and that is forecast to increase by more than 3% in the next three years, wouldn't it be sensible to let it run for at least that period.
Is it that simple? Or am I being naive here?
There are fairly draconian penalties if you cash in before the term, so I want to be sure before I decide either way.
On the face of it though, it seems like a better deal than fixed rates that are available elsewhere, Is it really that simple?

AnotherJoe

See moneyvator article on this where he agree with your analysis. As do I.
Go for 5 years. No reason whatsoever to go for 3.

...on the subject of which there are no 'draconian penalties" for cashing in early.
What do you think they are?

Malthusian

As long as you don't cash it in within the first 90 days you will get back at least what you put in, so I don't think the early encashment penalties are that draconian.

Because the certificates are no longer available (and who knows if they ever will be) I would be inclined to hang on to them unless you have a specific other use in mind for them or have decided to invest in something with higher risk and return (which doesn't sound like the case). The worst that can happen is that you miss out on the paltry return a conventional cash investment would offer, whereas the upside if inflation goes up is attractive.

You should go for the 5 year term as you could always encash immediately after the three year anniversary (*edit* in which case you lose virtually nothing - 90/365 * 0.01% and the loss of index-linking for the year is nil if you encash on the anniversary), whereas if you go for the 3 year option they might have withdrawn the option to roll over at the end of the term.

kidmugsy

The draconian penalty is that if you withdraw some of the money you lose all that year's index-linking on all of the money.

If that seems to be a real risk, you could always instruct that a small part of the money be put in a 3-year certificate, and the bulk into the 5-year. Then if you need a bit of money, take it from the 3-year.

AnotherJoe

kidmugsy wrote: »

The draconian penalty is that if you withdraw some of the money you lose all that year's index-linking on all of the money.
.

I wasnt aware of the some/all split but that would be easy to avoid. since you ought to have some other money knocking around elsewhere before you put it in this, it's not an instant access account and wanting to get part out would imply you thought it was.
So the scenarios where you only needed a small part of it would be vanishingly small. . In general if you want to take it out you simply take it out just after a yearly period ends.

EdGasket

Why go for 5 years when you can go for 3 years which gives you a penalty-free option to do something else with your money after 3 years? In my experience they always give you the option of another 3 or 5 years anyway though I guess that isn't guaranteed.

LXdaddy

Certainly re-invest unless you have a specific need for the cash.


I think there are swings and roundabouts to the 3 or 5 year question. I am rolling each of my accounts over as they come up and changing the 5 year ones into 3 years.


My reasoning is that at some point interest rates will start to rise again so maybe I'll have a chance of getting that earlier.


But the counter argument is that the rollover option might be withdrawn. Or (perhaps more likely) the index linking could change from RPI to CPI.

AnotherJoe

EdGasket wrote: »

Why go for 5 years when you can go for 3 years which gives you a penalty-free option to do something else with your money after 3 years? In my experience they always give you the option of another 3 or 5 years anyway though I guess that isn't guaranteed.

1 because renewal isnt guaranteed. These are a great deal with inflation rising the next few years it's quite possible they will not renew them or if they do will change from RPI to CPI. You'd get another 2 years if you went for 5 years.
2. If you buy 5 year but decide you wish to cash in at 3 you can without penalty. So you have that option anyway it's a false choice to say it gives you the option to renew, you don't know that.

AnotherJoe

LXdaddy wrote: »

I think there are swings and roundabouts to the 3 or 5 year question. I am rolling each of my accounts over as they come up and changing the 5 year ones into 3 years.

My reasoning is that at some point interest rates will start to rise again so maybe I'll have a chance of getting that earlier.
.

But you have that option to renew at 3 i!! If higher rates are available (highly unlikely) simply cash your 5 years in at 3. Plus you open yourself up to the possibility of (1) no renewal at 3 , (2) renewal only at CPI. There is zero benefit to renewing for 3. Zero. it's all downside.

Hopper55

Many thanks to you all for your advice.
My thinking behind the 3-year deal was that having looked at forecasts for the future of the RPI - which I realise are just that - forecasts, they are predicting things to level out around 2019 so I would be covered for the most dramatic period post Brexit.

However, I see the logic in sticking with the 5-year and the fact that the 'draconian penalties' are not so bad provided I cash in at the right time post-anniversary now.

I am 61 next month and looking to retire in the next three years, so the decision was between cashing in and buying that Porsche I had always promised myself (secondhand, of course) or rolling over until around my retirement date.

I think I will roll it over for the five years and as long as it runs for at least 90 days it is probably in the best place currently available.

This discussion has been most helpful in putting things straight in my mind, thanks again.

Malthusian

LXdaddy wrote: »

My reasoning is that at some point interest rates will start to rise again so maybe I'll have a chance of getting that earlier.

If at the three year anniversary NS&I are offering RPI + 1% or similar, you can just encash your five year certificate and pay a draconian penalty of 37 pence (90/365 * 0.01% * £15k, loss of index-linking for the year = nil because it's the anniversary), then reinvest in the new higher-rate certificates.

Unless they're roll-over only and not on general sale. But if they're roll-over only the chances of the rates being significantly more attractive are even tinier.

The risk that the index-linked certificates might not be available at all at the three year anniversary, or have changed from RPI to CPI, is much more significant.