No-brainer to renew NS&I index-linked certs?

IanManc

alinkliter said:

There is an option of 2 years as well. Think I will do that, don't see any benefit of tying up for 5 years for the same interest rate.

The option to roll over into a 2 year certificate is only open to holders who are rolling over a 2 year certificate. They can choose terms of 2, 3 or 5 years.

People with 3 or 5 year certificates that are maturing can choose either 3 or 5 year terms at renewal, but not 2 year terms.

I think it is a mistake to roll over for 2 years, if that's available to you. Savings Certificates are a legacy product as far as NS&I are concerned. They've not been on general sale for years, and there seems little prospect of them ever coming back. There is no other tax free index linked plus (tiny) interest cash retail investment on the market. NS&I have no incentive to increase the interest rate even if rates in the market go up generally. After all, they've slashed the interest rate and changed from RPI to CPI for new certificates in the last few years, and holders are still rolling them over.

I'm surprised that they've allowed rolling over to carry on for this long, and it could stop at any time. Therefore I think it is sensible to roll them over for as long as possible - 5 years - in case they stop roll overs altogether.

naedanger

IanManc said:

eskbanker said:

naedanger said:

If you cancel cash in one of these bonds a day after their anniversary date what is the penalty? Is it just 3 months of interest at 0.01%, so £0.25 per £10,000?

If so then is there an argument for renewing with a 5 year term since you have an option to cash in just after any anniversary at virtually no cost?

Or am I reading the early redemption penalty incorrectly?

I believe you are reading it incorrectly, the interest rate is CPI plus 0.01%, so the early access penalty is dependent on the prevailing inflation rate but, barring deflation, will be significantly higher than 0.01%.

No, the interest rate is 0.01% .

Savings Certificate investments grow each year by the appropriate figures for "index-linked growth and interest". That is how it is termed in the Key Features leaflet.

There are two consequences of cashing in early.

Firstly, you lose all the index-linked growth for the whole investment year in which you cash in on the full amount of the certificate, even if you only cash in part of it. That means if you cash in only part then the remainder left invested only gets interest of 0.01% for the whole investment year and no index-linked growth, and the bit you take out - or all of it if you cash the lot in - doesn't get any index-linked growth for that investment year either.

Secondly, there is a "penalty deduction" of 90 days interest, the current rate of which is 0.01%, from the amount withdrawn.

So if you are going to cash in early then the best time is just after the anniversary of opening, because the loss of index-linked growth will be minimal; and the penalty will be the 90 days interest, which is unavoidable whenever you cash in early.

So provided you are never going to wish to encash only part of the bond then the 5 year term seems the better one compared to the 3 year bond, since the cost of encashing the whole of it (a day after an anniversary) is only £0.25 per £10,000?

So you have effectively got a guaranteed option of the same terms as the 3 year bond (other than the option to take any reinvestment options available at that time) with an option to continue for 5 years. Whereas the 3 year bond has no  guaranteed option to continue for 5 years.

(I suppose there are still scenarios where you might have been better choosing a lower term e.g. you will definitely want money after 2 years, or you think the reinvestment terms on offer after 2 years will be better than the existing terms and also won't be available after 5 years.)

eskbanker

Fair enough, I was looking at https://www.nsandi.com/files/asset/pdf/index-linked-savings-certificates-summary.pdf, which states:

What is the interest rate?

2-year term, Issue 44 (only available when renewing an existing 2 year Certificate)
Index-linking to CPI + 0.01% tax-free/AER

3-year term, Issue 27
Index-linking to CPI + 0.01% tax-free/AER

5-year term, Issue 54
Index-linking to CPI + 0.01% tax-free/AER

which implies to me that all of that is regarded as interest, but the key features document does seem to differentiate between interest and index-linked growth and is likely to be more reliable as the more comprehensive document - the dangers of trying to squeeze everything into a standardised FCA-prescribed summary box format!

colsten

IanManc said:

Therefore I think it is sensible to roll them over for as long as possible - 5 years - in case they stop roll overs altogether.

A lot would depend on how old the holder is, and what their plans for the money are. A 70-year old who wants to pay for their round-the-world cruise with the money would probably not consider it sensible to tie the funds up for another 5 years. OTOH, a 90-year old who wants to leave the money to their heirs may well decide it's a no-brainer to roll it over. So might a 40 year-old who plans to use the money towards early retirement in their 50s. But not a 40 year-old who needs the money later this year for a new kitchen or a new car or a wedding or what have you.

Bottom line is that for some people it's sensible to roll them over for the max duration, for others it isn't. FWIW, I will roll mine over for 5 as I don't need the money in the next 5+ years (and it wouldn't make sense for me to redirect the money to investments).

naedanger

colsten said:

IanManc said:

Therefore I think it is sensible to roll them over for as long as possible - 5 years - in case they stop roll overs altogether.

A lot would depend on how old the holder is, and what their plans for the money are. A 70-year old who wants to pay for their round-the-world cruise with the money would probably not consider it sensible to tie the funds up for another 5 years. OTOH, a 90-year old who wants to leave the money to their heirs may well decide it's a no-brainer to roll it over. So might a 40 year-old who plans to use the money towards early retirement in their 50s. But not a 40 year-old who needs the money later this year for a new kitchen or a new car or a wedding or what have you.

Bottom line is that for some people it's sensible to roll them over for the max duration, for others it isn't. FWIW, I will roll mine over for 5 as I don't need the money in the next 5+ years (and it wouldn't make sense for me to redirect the money to investments).

Though the 70 year old could still get their money out after exact 1, 2, 3, or  4 years for a £1 penalty per £40,000 of bonds. (And the penalty for early encashment does not depend on the bond's duration.)

The person who needs the money later this year shouldn't invest at all. They will at best make less than £1 on encashment within a year on a £10,000 bond of any duration (2, 3 or 5 year bond).