Have we got too much in index linked savings?

Albermarle

Downthedrain said:

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.

If your ISA's returned 5% when interest rates had flat lined, then presumably these were stocks and shares ISA's ?
However you say you want zero risk ?

Plus We keep coming back to land or property as an investment prospect,

Anything but zero risk !

Not that I am advocating zero risk, in fact it does not exist. Even with NS&I index linked savings, you have a risk that you are missing out on investment growth. During the last decade, investments powered ahead of any cash savings, so the risk is that this will happen again.

Stubod

..we have a few ILS's and overall they have probably performed better than any other savings and investments we have, so happy to keep them. Although as we are now passed 60 we will only be renewing them for 3 years. Previously we had increased them all to 5 years on the assumption they (gov) may well decide to end them. Although I think this is their plan, hence the reason for not allowing early closures, and not having any new ones available for the last few years. Very much a legacy product now....  

Downthedrain

The 5% Cash ISAs were 5-year issues that we renewed  immediately prior to inflation collapsing. The index-linked savings had not done as well over the same period.

We've previously invested in land and property and made substantial returns every time, but have bought at exceptionally low prices at the bottom of the market. Presently we own a piece of land with an existing building, access and services suitable for conversion to a dwelling and bought for £6,000 23 years ago. Currently valued at £220,000. I don't see where the risk would be in that, as we paid below market price even for just agricultural land at the time.

I'd already mentioned that we don't want to be landlords - too many complications for us. We would consider being passive investors, though. When interest rates were below 1% recently we agreed to offer a loan of £60,000 at 6% per annum on the capital sum, not the reducing balance (and no early redemption) fixed over 3 years on a commercial property formally valued at £280,000 just for the land (suitable for housing development), by way of a 100% charge on the property. Borrower to pay all fees. The contract agreed transferred the property to us in the event of default. The risk of us being accidental owners in the event of default was also mitigated by us having a number of buyers in the waiting. In the end this didn't go through, as the owner got an unsecured loan by other means.

The problem with this type of investment is they take a long time to research and secure and such deals are hard to find. These are opportunity investments - not something that you can plan for

Pensions are final salary + full state pensions (not yet due).

The reason for saving is protection later on in life to offer choices in what we do. We don't need immediate cash and live very modest lifestyles. We don't want to end up in shut-up-and-eat residential care, sitting in a circle in an overheated room with the TV on at maximum volume.

DavidAC

Over the decades they have been the best cash investment I have made. Sure there were times when the return was low compared to other cash savings, but they were not losing and are tax free. Periods of high inflation like we are in now has more than made up for it. 13%+ when the base rate and savings rates were still low with the MPC being slow to act. During low inflation other cash rates never beat them by much.

Fixed rate savings are near the highest they have been for decades due to high inflation. What about putting some money into a longer term fixed rate. If inflation stays high the ILS will do well. If inflation falls substantially the fixed rates taken out now will do well. ILS will never lose against inflation.

Downthedrain

With present 3-year fixed rates being relatively high (up to 5.9%) that would make sense, especially as the government needs to get inflation down, which would threaten returns on ILS and possibly give comparatively lower yields over that period. We also have to factor in paying tax. What happens after that three years is unknown - the renewal opportunities for a matured fixed rate deal may not be good and it could turn out that ILS were the best choice in the longer term. I suppose that's the quandary - to stick with the existing ILS, to diversify those savings, or to close some ISAs and move that money into regular fixed rate savings.

Other forms of investment have been mentioned, but there seems to be a lot to understand and any step safely away from cash savings requires an in-depth knowledge of the catches and caveats, or a lot of experience.

longleggedhair

I have the same quandary. Although I have a comparatively small amount compared to you they have performed very nicely over the last couple of years, however I hate the thought of the money being tied up with no opportunity whatever to access the money.

I think as a compromise when mine mature (2026) I may move them into the 3 year option. As has been said for many years people would snatch your hand off to buy them in todays market, so perhaps better to stick with them, despite the constant meddling of national savings making them progressively less and less attractive.

DavidAC

ILS, fixed rate cash, EA cash, stock market, bonds, property. It is all a gamble. With ILS you know it is at least going to match inflation (+0.01%  ). With other cash options you might get a better return. Do you trust the BOE to keep inflation down and set a base rate to give savers a return above inflation? The 'low risk' bond market fell sharply with base rates going up leaving many with big losses. Stock markets go up and down, you can make or lose a lot.

Do you trust Labour to keep a lid on inflation if they get in?

So place your bets. Personally ILS will probably be the last investment I cash in.

Downthedrain

At least we do have the choice of leaving them alone. They were always intended as the last things we cash in before we die, but recently when reviewing our savings wondered whether this is the right thing to do. It's quite positive to get opinions from others - it really is a great help to openly discuss such things and reappraise our position. Whilst gambling with a return is something I'd be prepared to do, anything that threatens our capital would be too much of a risk, as we couldn't recover financially.

DavidAC

You are gambling your capital with any investment that is not guaranteed to at least keep up with inflation. If inflation is 5% more than your return, you HAVE effectively lost 5% of your capital (at least what it can buy).

Read this Inflation rates vs savings account rates - Finder UK.

masonic

DavidAC said:

You are gambling your capital with any investment that is not guaranteed to at least keep up with inflation. If inflation is 5% more than your return, you HAVE effectively lost 5% of your capital (at least what it can buy).

Read this Inflation rates vs savings account rates - Finder UK.

Using the "average interest rate paid on variable Individual Savings Accounts (ISAs)" is setting the bar very low. There are many accounts with derisory rates diluting that average down, plus the "ISA penalty". Paul Lewis did a blog post on active cash rates quite a while ago (see https://paullewismoney.blogspot.com/2016/06/cash-vs-shares.html ), and while his comparison with the FTSE 100 over 5 year periods was extremely questionable, the methodology for cash specifically was much more appropriate (use of the best buy 1 year fix rate). For rate tarts (even those using access accounts), cash beats inflation significantly more of the time than for the average easy access cash ISA. That said, over the long term, a saver cannot hope to beat inflation by more than a whisker, and risks a real term loss depending on their sequence of returns.