NSI Certificates

dqnet

Hi, there is quite a few threads about these certificates now moving to CPI from RPI but I'm a little confused as to how they remain good value (excuse the ignorance or if I've missed something here). Unless I'm understanding it wrong let's say a five year fixed term with Secure Trust Bank pays 2.6% isn't that already beating the CPI rate from day one since the CPI is currently at 1.8%.



I understand the Tax free element remains but with someone already under the PSA limit are these still worth holding onto?



Thanks!

polymaff

For the reason you mention - tax free. That they do provide some cover for inflation, too. Imagine your STB account delivering a steady 2.6% when inflation has risen to 5%! There is also the government's belief that they are "100% safe" however much your total savings with NS&I. This helps those hitting fscs limits for other institutions - and fscs will probably default before HMT does.


Less so than when it was RPI, blurred by the SRS and PSA, but still of use to some.

dqnet

polymaff wrote: »

For the reason you mention - tax free. That they do provide some cover for inflation, too. Imagine your STB account delivering a steady 2.6% when inflation has risen to 5%! There is also the government's belief that they are "100% safe" however much your total savings with NS&I. This helps those hitting fscs limits for other institutions - and fscs will probably default before HMT does.


Less so than when it was RPI, blurred by the SRS and PSA, but still of use to some.

Ah right. That makes more sense. I've looked at the history of the CPI for the last year and it's only ever reached to 2.4% once. For that matter going by this: https://www.statista.com/statistics/306648/inflation-rate-consumer-price-index-cpi-united-kingdom-uk/ the CPI hasn't even reached 2.75 since 2012. Just seems as if the money may be better off in a 5 year fixed account guaranteeing 2.75% with Gatehouse for example. I can see the tax benefit being the only major factor.



I was wondering what most people were doing with their certificates after the move to CPI..?


Thanks!

AnotherJoe

The other difference is the five year term. I presume with the 5 year interest account you cannot access the money until the whole five years is up other than if the account holder dies ? With NS&I you can access it any time and if not an emergency, without loss.

bowlhead99

dqnet wrote: »

I was wondering what most people were doing with their certificates after the move to CPI..?


Thanks!

The vast majority who do not urgently need the money will choose to keep them because whether you measure inflation in RPI or CPI, no other financial institution is willing to give you a deposit account which tracks inflation. It is a deal so good that the government no longer offers it to anyone who doesn't already have a maturing certificate, because it is an expensive way for them to raise funds from the public - they are guaranteeing you'll get your money back plus inflation, whether inflation is 1%, 2%, 5%, 10%.

You ask "Secure Trust Bank pays 2.6% isn't that already beating the CPI rate from day one since the CPI is currently at 1.8%?". No it is not already 'beating' it: because you are not comparing apples with apples. The 2.6% is what the bank propose to pay you going forwards, whereas the the 1.8% is what happened to the price of a basket of goods and services looking backwards, from March 2017 to March 2018. What will happen to the prices of goods and services going forwards from April 2019 to April 2024 is unknown.

If a person wants to properly grow their wealth over the long term, they would typically use investments in investment funds (e.g. in S&S ISAs or pensions etc). But doing that involves a risk that the investments fall in value in the short term or medium term, because investments go up and down in value from time to time and it's only if you can afford to leave them for the long term that you would expect them to definitely pay off and maintain or grow their value in real terms against inflation.

Whereas, if someone is unable to commit their money for the long term, and instead they just want to temporarily put their money aside for a rainy day in the short term or medium term (e.g. a month or year or five years) they would not use investments, and would instead use cash deposit products with banks or building societies or NS&I, so that their money will definitely still be there when they need it and doesn't risk going down in value in the meantime. Makes sense, right?

The problem with using cash deposit products - rather than something which gives you investment risk such as S&S investment funds - is usually that the cash deposits plus interest earned on them are not guaranteed to maintain their value against inflation. When you put the money aside for a rainy day, it is enough to buy a basket of goods and services at today's prices, but in five years time when the rainy day comes, even though you will have earned interest on the deposit it may no longer be enough total money to buy the basket of goods and services. A deposit account is therefore an imperfect solution to storing your rainy day cash savings.

The exception is a deposit account in the form of an NS&I certificate which says that they will give you enough interest to make sure you can still buy the same basket of goods and services in the future as you can buy today, with no tax to pay on the proceeds. Wow, that's pretty handy. It turns the imperfect solution for temporarily storing your money into a perfect solution for temporarily storing your money, as there is no investment risk and no inflation risk. You won't grow your wealth by using the product (because if you want to grow your wealth you have to use invesment products over the long term, and risk some loss). But you will at least 'preserve' your wealth without risk of losing money in real terms - which is, after all, the goal of using cash savings.

Your personal rate of inflation will be different from the national average inflation rate because you might spend 10% of your spare money on wine and 20% on petrol and 15% on electricity bills and 5% on internet subscriptions etc, while the national average which makes up CPI is some other mix. However it is a decent attempt at a solution, and you are one of the lucky few who is able to get the product. Some people would bite your arm off to be able to take your place and be offered it.

The fact that some people are very jealous of you being able to get the product (and probably be able to keep it again at the next maturity three or five years down the line if you still want it), does not necessarily mean it is what you want. You might think it is better to take a guaranteed fixed rate which Secure Trust or Gatehouse's marketing department can currently afford to pay to attract customers. But Secure Trust, or any other bank, are not desperate enough for customers that they would be willing to offer you an inflation-proof return. The potential risk and cost for them is too high. The only way to get that is to be an existing customer of NS&I with a maturing ILSC.

If it was me, I would hang on to them. RPI vs CPI is a red herring.

Brilley

..for all the reasons specified in the very comprehensive thread above we are keeping ours rolling over for the maximum time (5 years) regardless of the change to CPI....

Albermarle

for all the reasons specified in the very comprehensive thread above we are keeping ours rolling over for the maximum time (5 years) regardless of the change to CPI....

Same for me !
The fact you can not buy new ones anymore is a good clue as to the fact they are a good product .

dqnet

Just what I needed..! Thanks!


p.s. bowlhead99 - Many Thanks for taking the time to explain the advantages so comprehensively.

gogirlgo

there was an article in the sunday telegraph. they have a petition to reverse the changes. please sign and pass it on. we are going to receive a lower rate and i did not even know about it until i received a maturing bond letter. i dont think people know so please pass on the petition.
petition.parliment.uk/petitions/233939 also read the article in the money section written by sam barker. it is going to make a big difference to our investments and all the people who are saving for their retirement. thanks

gogirlgo

you can still get the rpi until tomorrow. i have rolled my 3 yr bond over for 5yrs so i will get it for the full term. all bonds after 1.5.19 will follow the cpi. as they are tax free and totally safe i will be keeping ones that mature after this date although i am very disappointed that this has happened.
please sign the petition.

System

gogirlgo wrote: »

there was an article in the sunday telegraph. they have a petition to reverse the changes. please sign and pass it on. we are going to receive a lower rate and i did not even know about it until i received a maturing bond letter. i dont think people know so please pass on the petition.
petition.parliment.uk/petitions/233939 also read the article in the money section written by sam barker. it is going to make a big difference to our investments and all the people who are saving for their retirement. thanks

Why do you think that the government should subsidise your investments? If you object to the change then invest elsewhere rather than signing a silly petition!