NS&I index linked

BarkingMad

Hello

How does one (sound posh - but I'm not!) work out the effective rate for NS&I index linked savings. The website says 1.35% + index linking for either 3 years or 5 years.

Can anyone explain how the effective rates are calculated? I've seen articles that say it is between 6 and 9% depending upon your tax situation.

Thanks

Jonbvn

BM,

If you are a basic rate tax payer, then the equivalent gross interest rate would be calculated as follows:
IR = (RPI+1.35)/0.78

For higher rate Tax-Payer:
IR = (RPI+1.35)/0.60

RPI = retail price index, which varies every month. For Jan 2008 it was 4.1%.

Reestit_Mutton

Jonbvn wrote: »

BM,

If you are a basic rate tax payer, then the equivalent gross interest rate would be calculated as follows:
IR = (RPI+1.35)/0.78

Savings interest is only taxed at 20% for basic rate tax payers. Thus the calculation you need is:

IR = (RPI+1.35)/0.8

Reestit Mutton

BarkingMad

Thanks

So, the IR calculation would give me the effective rate, assuming that RPI remained constant at 4.1, so if I invested

1,000 over 3 years I would get 1000 * (1.35+4.1)/0.80 = 68.12 per year???

I'm confused because the NS&I website (for a 3 year) says, with my calcs interleaved


purchase price + Index-linking for year 1 + 1.1% of purchase price = 1st anniversary value
1000 + (4.1% of 1000) + 1.1% * 1000 = 1051.....now, do I do the /0.8 calculation here?

1st anniversary value + Index-linking for year 2 + 1.3% of 1st anniversary value = 2nd anniversary value

2nd anniversary value + Index-linking for year 3 + 1.66% of 2nd anniversary value = maturity value

Thanks for your time

meester

BarkingMad wrote: »

Thanks

So, the IR calculation would give me the effective rate, assuming that RPI remained constant at 4.1, so if I invested

1,000 over 3 years I would get 1000 * (1.35+4.1)/0.80 = 68.12 per year???

I'm confused because the NS&I website (for a 3 year) says, with my calcs interleaved


purchase price + Index-linking for year 1 + 1.1% of purchase price = 1st anniversary value
1000 + (4.1% of 1000) + 1.1% * 1000 = 1051.....now, do I do the /0.8 calculation here?

1st anniversary value + Index-linking for year 2 + 1.3% of 1st anniversary value = 2nd anniversary value

2nd anniversary value + Index-linking for year 3 + 1.66% of 2nd anniversary value = maturity value

Thanks for your time

You only actually GET RPI + 1.1%.

The /0.8 bit is to work out the equivalent gross interest rate.

In other words:

investment A pays 10%, taxable
investment B pays 8%, tax-free

So from £1000, A gets £100, the government keep £20, leaving you with £80
B gets £80, the government gets nothing

martinman3

That calculation will give you the effective rate over the term, either 3 or 5 years so you can only use that to calculate the total interest at maturity. To complicate matters slightly the actual interest rate varies annually over the term.

The 3 year goes 1.1%, 1.3%, 1.66%
The 5 year goes 0.95%, 1.15%, 1.35%, 1.55%, 1.76%

As you can see, you only get the 1.35% on certificates held for the full term, cash it in early and you get a lower effective rate on the amount cashed in. The rates in later years are higher so that the effective rate over the term when compounded is 1.35%.

To calculate its value at the end of year 1 would be
1000 + 1000 * (4.1% + 1.1%) = 1052

You have forgotten that £1000 invested will give the same amount of interest no matter which rate of income tax you pay but the effective interest rate may be different depending on the investor's circumstances.