Query: NS&I Index-linked Certificates interest

Sapphire

There has been a murmur about inflation targets being 'reset'. If this happens, what would be the impact on the interest on National Savings Index-linked Certificates for those of us that hold these certificates? Would this mean that people would get less interest, or would National Savings have to stand by its commitment to pay the interest rate originally promised, i.e. based on the current system?

Forgive me if this is a stupid question, but I am rather confused by this goverment's ducking and diving. . .:rolleyes:

Jonbvn

The savings certs are based on the RPI issued monthly by ONS. Of course, any gov't can decide what is or isn't included in CPI or RPI. I think that if there was a big change in how RPI is determined, then the gov't could face a class action. Need to check the T&C's for the certs very closely.
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ManAtHome

Targets being reset would be good news for RPI-linked certs - basically means that el BankO d'Excess could cut rates which would push RPI higher.

Reestit_Mutton

Sapphire wrote: »

There has been a murmur about inflation targets being 'reset'. If this happens, what would be the impact on the interest on National Savings Index-linked Certificates for those of us that hold these certificates? Would this mean that people would get less interest, or would National Savings have to stand by its commitment to pay the interest rate originally promised, i.e. based on the current system?

Forgive me if this is a stupid question, but I am rather confused by this goverment's ducking and diving. . .:rolleyes:

It is highly unlikely that the Govt will force a politically-motivated change on either CPI (the govt's preferred measure of inflation) or RPI (the measure of inflation used by NS&I).

If the Govt needs to redefine the BoE's remit to allow them to reduce interest rates further they will either increase their inflation target or simply create yet another inflation measure for the BoE to follow which excludes highly inflationary items such as food and energy costs. The fact that two different inflation measures already exist (CPI & RPI) should tell you something about the government's preferred option.

Reestit Mutton

Jonesya

ManAtHome wrote: »

Targets being reset would be good news for RPI-linked certs - basically means that el BankO d'Excess could cut rates which would push RPI higher.

Well if RPI increases then you would receive more interest but it's not really a gain it's just a compensation for the real value of your initial investment falling in value at a greater rate.

The real interest rate you receive wouldn't change so, assuming the inflation you face matches the RPI index, you'd be no better or worse whatever RPI does.

martinman3

Jonesya wrote: »

Well if RPI increases then you would receive more interest but it's not really a gain it's just a compensation for the real value of your initial investment falling in value at a greater rate.

The real interest rate you receive wouldn't change so, assuming the inflation you face matches the RPI index, you'd be no better or worse whatever RPI does.

Of course, you are correct but I am sure ManAtHome mean't that RPI-linked certs would be a better investment compared to variable rate cash ISAs and to some extent the recent fixed rate bonds both of which most savers have.

If the inflation target was relaxed, those who are too young to remember the 1970s would learn that even their variable rate accounts being tax-free wouldn't be enough to prevent their savings being worth less due to inflation.

tradetime

Sapphire wrote: »

There has been a murmur about inflation targets being 'reset'. If this happens, what would be the impact on the interest on National Savings Index-linked Certificates for those of us that hold these certificates? Would this mean that people would get less interest, or would National Savings have to stand by its commitment to pay the interest rate originally promised, i.e. based on the current system?

Forgive me if this is a stupid question, but I am rather confused by this goverment's ducking and diving. . .:rolleyes:

The "target" you refer to has nothing to do with how either CPI or RPI which sets the rates of index linked certs is calculated, thus nothing would change from how you understand it now.
The BOE's mandate is to control inflation and the gov't has placed, I believe, a 2% "target" rate of inflation for the BOE which they are finding impossible to hit given the fears surrounding the property market and an imminent economic slowdown, coupled with rising global inflation.
So the murmurs you hear will be related to relaxing the 2% target, maybe to 2.5% to give the BOE more breathing room, as right now with the current target they should be raising rates.
How does this affect you? As someone else said, if they relax that "target" the BOE does not have to fight inflation quite as hard and RPI will likely rise giving you a better headline rate on your certs, of course any other savings you have will lose out since inflation will be eating into their real value.

Sapphire

Many thanks for all your helpful answers!

ManAtHome

Jonesya wrote: »

The real interest rate you receive wouldn't change so, assuming the inflation you face matches the RPI index, you'd be no better or worse whatever RPI does.

HUH - DOH!!! If you're a higher-rate taxpayer, quite likely your inflation rate will be lower than CPI/RPIX/RPI making RPI-linked certs even more of a no-brainer!

martinman3

After posting about a similar index-linked product on another I realised something which I had not seen mentioned.

The annual rate of inflation measured by the RPI is 4.2%, meaning that the change in RPI between March 2007 and April 2008 was equivalent to an increase of 4.2%.

You would think that if you were in a pub discussing how good your savings return was you could say you have received in the last 12months RPI+1.35% = 5.55% and it would be correct. But for potential new buyers this does not indicate what you effectively could be getting now in order to compare with alternatives.

By using the published RPI percentage over the last 12 months it is hiding just how good Index Linked certs are right now (and how bad the economy is :eek: ).

Looking at the RPI indices for Mar 2008, 212.1, and April 2008, 214.0, gives an increase in 1 month of 0.8958%. If you had an account with a major bank this would be quoted as 0.8958 x 12 = 10.7496% AER tax-free and that is what was being earned by NS&I Index Linked certs in April, excluding an annual bonus of 0.25%/0.35% on top (previous issue 1.35%). :cool:

For Jan 2008, 209.8, and Apr 2008, 214.0, gives an increase in 3 months of 2.00%, 2.00% x 4 = 8.00% AER tax-free excluding annual bonus.

For Oct 2007, 208.9, and Apr 2008, 214.0, gives an increase in 6 months of 2.44%, 2.44% x 2 = 4.8827% AER tax-free excluding annual bonus.

Just from these calculations you can see that the acceleration in inflation was just after Christmas and those holding certs then will probably get a fantastic return in the 12 months following.

Jonbvn

There is no doubt that these certs should form a part of anyone's portfolio. The only draw-back is that you must tie your money up for at least a year.