Have we got too much in index linked savings?

Downthedrain

My wife and I have a large proportion (over 40%, in 6-figures) of our savings invested in NS&I index-linked certificates. Whilst these have done very poorly at times, we've stuck with them and in recent years we've had exceptional returns - as much as 13.4% on the ones that are still indexed on RPI (which will be up for renewal early next year).

Looking at the schedule of renewal dates for our certificates, the early cash-in option that has been removed will now mean that from next year most of the money invested would be unavailable to us for either 3 or 5 years, as most are up for renewal. Some certificates were renewed immediately prior to the change in rules, but these are in the minority.

We're unsure whether having such a high proportion of these certificates is a good thing - should we be looking to diversify more? It's taken a long time to get a really good return on these and a repeat of the almost zero-return years would be quite depressing. We're both tax payers at the standard rate and have zero appetite for risk.

ColdIron

I'm still quite positive on them. I think it will be a long time before we see the historically low inflation rates again

With retirement and the removal of the early cash in option I am going to switch to a 3 year term and cross my fingers

I diversify beyond cash but if you have zero appetite for risk your options are more limited. There aren't many tax free avenues and I assume you make use of ISAs, have readily accessible cash and decent pension provision

If you juggle with 2 and 3 year renewal terms you could set up a reasonably spaced 'ladder' should you wish to gradually move away from them in future

FIREDreamer

Due to the new lock in, I am not renewing the one that matures on 13 November - strangely enough my bank is already showing a credit of the maturity funds as a pending transaction for Monday 13th so NS&I are very efficient in paying out the maturity amounts.

My last one matures in 2027 so I will be lapsing them all as and when they mature as I don’t like the lock in ar a potentially rubbish rate.

Inflation seems to be being tamed for now and the monies will be used in my S&S ISA account.

At least you get a known nominal return on a fixed rate bond from a bank or building Society.

masonic

If you really have zero appetite for risk, then there is little else you can do. The next rung up the risk ladder would be to buy an Index Linked Gilt (RPI + about 0.6% through to 2030, depending on maturity date chosen), but that can go down in nominal terms if RPI goes negative (I don't think that's on the cards, but who knows). Cash savings can and have been losing money vs inflation recently and do so periodically.

QrizB

Downthedrain said:

My wife and I have a large proportion (over 40%, in 6-figures) of our savings invested in NS&I index-linked certificates.

What is the other 60% invested in? If it's in eg. a global tracker fund (example), you've got a 60/40 equities / fixed interest split as is commonly recommended.

Downthedrain said:

We're both tax payers at the standard rate and have zero appetite for risk.

Zero appetite for risk is also zero appetite for growth, I'm afraid.

Hoenir

Diversify in what though?  A very different investment era most likely lies ahead. Quantitative Tightening has no historical precedent.

IanManc

ColdIron said:

If you juggle with 2 and 3 year renewal terms you could set up a reasonably spaced 'ladder' should you wish to gradually move away from them in future

You can only decide to choose a 2 year term if you are renewing a 2 year certificate. The option of a 2 year term is not available if you are renewing a 3 year or 5 year certificate. 

Downthedrain

QrizB said:

What is the other 60% invested in? If it's in eg. a global tracker fund (example), you've got a 60/40 equities / fixed interest split as is commonly recommended.

Mainly ISAs, plus some short-term fixed-rate bonds. We both have good pension provision, having sacrificed lifestyle for many years in order to ensure a good return in old age.

Altior

In theory at least, these are returning nothing, and just keeping pace with the buying power of sterling. It follows that when inflation is high, people with these types of holdings feel very satisfied, when others losing money in investments considered safe look on longingly.

It's only theory as your expenditure won't exactly match the basket that is used to calculate inflation. Nonetheless, the argument for this type of holding stays the same, regardless of the cash returns. That the buying power of the overall asset remains static.

The risk is that faith in fiat currency/sterling itself collapses. Which is not completely implausible. Whereas if you had an asset that is tangible, it will still command a market value, however that value is quantified/traded. Personally, while that risk remains marginal, in my view it is real. 

Downthedrain

Over the past two years we've seen a bubble, with an overall average return of 7.4% per annum tax-free. Prior to that, at times we've had ISA returns of 5% when inflation and interest rates had flat-lined. More luck than judgement. One reason we decided to stick with the index linked certificates was the warning of having to pay to save (even Martin Lewis was warning of this). In 2020 the Government even issued negative yield Gilts.

Overall, If I take a longer average I see that the savings haven't done as well as other investments. Maybe we're too fixated on tax-free returns - perhaps a better view may be to split off some of these funds and pay the tax.

We keep coming back to land or property as an investment prospect, though at this stage in life we don't really wish to become landlords. We've got about 6 months to decide on a plan and come to a firm decision before the majority of the certificates mature.

Linton

How can index-linked certificates have performed poorly?  They are certain to do what they say they will do - match inflation.  This is as low risk as you can get, more so than fixed rate accounts.  Whether that is what you want is your decision.

How many you sell depends on how much money you need and when and what risks you are prepared to take to achieve higher returns.  You have said very little about your circumstances and for what purpose you have saved the money.  Without this information no-one can come up with appropriate answers.

For example you say you have a good pension - is it DC with a pension pot or DB ("final salary" or similar)?
Is the pension sufficient to meet all your needs in retirement?  In how soon will you retire?  If it's DB is it capped?

If you have zero appetite for risk it may make sense to retain sufficient certificates to cover any gap in your retirement income.  Inflation is the main risk in retirement.  ANother option would be to increase your pension provision.

Strangely you are thinking of buying property.  That is hardly zero risk particulaly if you are relying on a steady income from rents.  Compared with say a cautious investment it is very inflexible - you cannot sell 10% of a property if you need more money.  Property is likely to involve ongoing work with the occasional periods of stress. It has been likened to running a small business.  Is that how you wish to spend your retirement?