Should I close my NS&I Index linked investment ?

longleggedhair

It looks like we’re in for a period of persistent inflation, lower growth, and an economy that is unable to withstand high interest rates. I’d say this is exactly the time to be keeping a product that many would love to hold, but is only available to those of us who already own them.

Hattie627

I'm keeping mine. However the cash held in them is a v small part of total cash.

Renewed one holding in May 2024 for five years, meaning I won't be able to access the cash until May 2029. A second holding is due for renewal in May 2026. May consider rolling over for only 3 years (if this is an option at renewal time) or splitting between 5 years and 3 years,

TheGreenFrog

Hattie627 said:

I'm keeping mine. However the cash held in them is a v small part of total cash.

Renewed one holding in May 2024 for five years, meaning I won't be able to access the cash until May 2029. A second holding is due for renewal in May 2026. May consider rolling over for only 3 years (if this is an option at renewal time) or splitting between 5 years and 3 years,

Out of interest what was the interest rate they offered on renewal?  I have pre 2023 certs and will almost certainly cash them in shortly after next anniversary of investment as they offer a poor return compared to equivalents.  The only thing that may stop me is the hope that on renewal I will get offered a decent real yield! 

IanManc

TheGreenFrog said:

Hattie627 said:

I'm keeping mine. However the cash held in them is a v small part of total cash.

Renewed one holding in May 2024 for five years, meaning I won't be able to access the cash until May 2029. A second holding is due for renewal in May 2026. May consider rolling over for only 3 years (if this is an option at renewal time) or splitting between 5 years and 3 years,

Out of interest what was the interest rate they offered on renewal?  

CPI inflation + 0.01%.

cricidmuslibale

longleggedhair said:

It looks like we’re in for a period of persistent inflation, lower growth, and an economy that is unable to withstand high interest rates. I’d say this is exactly the time to be keeping a product that many would love to hold, but is only available to those of us who already own them.

@longleggedhair I strongly suspect you're absolutely spot on in what you're saying above! All ILSC holders will have found that these invaluable certificates really helped soften the very fierce inflation blow during 2022-2023 especially; even the CPI + 0.01% issues were paying a total return of up to c.11% in early 2023, and the RPI + 0.01% issues were paying a total return of up to c.14% at that time! Now whilst it's very unlikely that there will be such a sharp spike in inflation in the near future, the current forecast is for rising energy prices in particular to push CPI inflation up towards 4.0% by the end of 2025, and the substantial increase in employers' National Insurance costs that will occur from April this year onwards is very likely also to lead to upwards pressure on inflation; employers are very unlikely to absorb all this extra cost by themselves, they will inevitably feel compelled to pass a good deal of this extra expense onto their customers in increased pricing, because the only real alternative is to make a significant proportion of their current workforce redundant, which in many small businesses like one finds in e.g. the Care Sector would be a very bad outcome indeed!  

Hattie627 said:

I'm keeping mine. However the cash held in them is a v small part of total cash.

Renewed one holding in May 2024 for five years, meaning I won't be able to access the cash until May 2029. A second holding is due for renewal in May 2026. May consider rolling over for only 3 years (if this is an option at renewal time) or splitting between 5 years and 3 years,

@Hattie627 You are in a very similar situation to me in this respect. I renewed a holding in April 2024 for 5 years which is now completely unavailable until April 2029. And I also have a holding due for renewal in May 2026 which I have already decided will be rolled over for another 3 years as long as this is still an option; however if the only term available for renewal is a 5 year one, I will accept it even though I'm not entirely comfortable with no access at all to savings for 5 years. [E.g. I will only ever save into a 5 year fixed rate bond if the minimum deposit is £1000 or lower, no matter how attractive the interest rate may be, whereas for fixed rate bonds lasting 3 years or less, I am prepared to deposit several thousand pounds more than £1k if the interest rate is high enough, relatively speaking, to justify this.]

The bleak truth as far as Index Linked Saving Certificates are concerned is that they have not been on General Sale at all since September 2011! I.e. only renewals of matured certificates have been available since then! The increase in the ISA allowance to £20,000 per tax year from 2017 onwards, and especially the fact that up to £20k per year can now all be placed in multiple Cash ISAs with different savings providers if one wishes to do so, is not at all conducive to the return to General Sale of ILSCs any time in the near future in my honest opinion, or indeed to an increase in the current Premium Bond total holding limit of £50,000 either! There has been quite a lot of talk recently about how fortunate British savers are to have such generous tax free saving allowances in comparison with other countries in Europe and elsewhere, and it would not surprise me one bit if the current Government fully agrees with this analysis and is looking to gradually reduce tax free saving opportunities over the next few years. What the Government, or more specifically HM Treasury, wants it to do, NS&I very quickly does of course!

So, to return to the original question: Should I close my NS&I Index linked investment? Unless you're happy to invest in Index Linked Gilts instead, on the understanding that unlike with ILSCs there is a very small possibility of a negative return but also the considerable upside of RPI index linking until the end of this decade, then my answer would be an emphatic No!

SnowMan

If we hypothetically consider a situation where index linked gilts don't exist, then ILSC (Index Linked Savings Certificates) offering CPI + 0.01% do represent a reasonable choice to protect your savings from being eroded by inflation.

Over 20 years (2005 to 2024) my own savings in mainly easy access accounts, a few fixed rate accounts, a few notice accounts and some regular savers have achieved CPI + 0.7%pa.

But over 10 years (2015 to 2024) my savings have earned CPI minus 0.8%pa.

It's quite possible that we will see the Government printing money again going forward and printing money dilutes the existing money out there, as has happened in the last 10 years (where the form of printing money known as quantitative easing has been in play). This has resulted in savings returning less than inflation. 

A lot is talked about the magic of compound interest, but it is often forgotten that inflation compounds as well. Over the past 10 years there has been no magic available through savings accounts in my case; over 20 years there has been some magic. 

If alongside your investments you have savings that will be needed in say 20 years to cover inflation linked expected expenditure deep into retirement, the obvious first comparison for protecting those savings over 20 years would be four linked 5 year periods of ILSCs which we might guess will be made available at say CPI + 0.01%pa. Or you could put that money into a 20 year index linked gilt currently offering CPIH inflation plus 1.75%pa (RPI + 1.75% pre 2030). Even if we ignore the more desirable inflation indices that gilts offer (the expectation is RPI > CPI, CPIH > CPI although there is no certainty of this) that 1.75%pa difference mounts up over those 20 years. You can then bring in the individual circumstances and own timescales, and nuances mentioned above into the equation, and other issues such as could the government conceivably default on index linked gilts. If going the ILSC route (rather than index linked gilts) you then need to ask yourself do those nuances and extra considerations  make up for that difference?      

masonic

The mention of different inflation measures raises another interesting point. At the moment, index linked gilts with maturities beyond 2030 appear to be carrying a yield premium over short-dated issues. This is not a duration-based premium, as short-dated conventional gilts yields are pretty flat across the next 2-3 decades. It looks like the market thinks CPIH+1.25% = RPI. This looks like a reasonable trade-off, although the difference between the two measures can vary and that could be seen as a source of risk when modelling based on past returns.

JamesRobinson48

Thanks @SnowMan for this analysis, especially your insightful scenario comparing ILSCs with long-dated index linked gilts (ILGs) in your final paragraph.

Yes, I'd love to get paid that 1.75% real yield to maturity, over the 20 years before the ILG (let's assume it's TR45) gets redeemed at par. Although in my case it could be closer to 1.5% real yield, due to top rate income tax on the coupons. And of course, at present, ILGs of shorter tenor than 20 years currently offer rather lower yields to maturity.

But I still hesitate to take the plunge. Market prices of such long-dated ILGs can be volatile: for example the quoted price of TR45 has fluctuated between ~£92 and ~£76 within the past one year alone. If my plans for the money change before the 20 years is up, or in the event of my death in the interim, there's no knowing today how much the ILGs could be sold for at that point. Whereas in the case of ILSCs, granted I'm locked in for 3 or 5 years at a time, but at the specified intervals I could certainly choose to exit at par.

In my case, I intend to hang on to my ILSCs, which comprise ~15% of my total financial assets. I see them as a long-term, stable and tax-free, low risk core holding. Hopefully in later life they will finance my care home bills (or my IHT bill as the case may be)!  But alongside my ILSCs, I am tempted to hedge my bets by allocating an additional, relatively modest (maybe 5%), amount to ILGs.  Modest due to their market price volatility at the longer end, which seems more like that of S&S equity fund investments (but possibly with less potential long-term upside). Although I am 50%+ invested in equities, I don't have unlimited tolerance of market price volatility: at my age I've already had enough excitement!