Tax free NS&I

stphnstevey

I was interested in Martin's tip this week about NS&I - how does he get the interest rate of 8.17%? Can anyone post the math?


Inflation Beating Guarantee:

The rate at which prices increase is called inflation. NS&I, the government backed savings organisation, has 3 and 5 year Index Linked Savings offering to pay 0.7% more than inflation. It uses the higher measure, Retail Prices Index (RPI) inflation, at 4.2%, meaning it pays 4.9% overall.

The big bonus is that these savings are totally tax-free, meaning it could be a winner for higher-rate taxpayers. Anyone on basic rate tax would have to be earning 6.13% in a normal savings account to match this, while higher rate taxpayers would need a huge 8.17% to beat it.

However, the cash must be left there for at least three years, and at least £100 must be deposited, so it's not for those who want a short term place to save. And if inflation drops, its relative performance could drop too. Yet as it's guaranteed to be higher than inflation and tax free, at least you know your money will always grow quicker than prices will rise.

Aegis

stphnstevey wrote: »

I was interested in Martin's tip this week about NS&I - how does he get the interest rate of 8.17%? Can anyone post the math?


Inflation Beating Guarantee:

The rate at which prices increase is called inflation. NS&I, the government backed savings organisation, has 3 and 5 year Index Linked Savings offering to pay 0.7% more than inflation. It uses the higher measure, Retail Prices Index (RPI) inflation, at 4.2%, meaning it pays 4.9% overall.

The big bonus is that these savings are totally tax-free, meaning it could be a winner for higher-rate taxpayers. Anyone on basic rate tax would have to be earning 6.13% in a normal savings account to match this, while higher rate taxpayers would need a huge 8.17% to beat it.

However, the cash must be left there for at least three years, and at least £100 must be deposited, so it's not for those who want a short term place to save. And if inflation drops, its relative performance could drop too. Yet as it's guaranteed to be higher than inflation and tax free, at least you know your money will always grow quicker than prices will rise.

4.9% is the net rate you receive. A basic rate taxpayer pays 20% income tax on their savings, and a higher rate taxpayer pays 40%. As such, if you divide 4.9% by 0.8 and 0.6 respectively, you get the equivalent cash savings accounts required to come up with that net interest rate.

Help at all?

stphnstevey

4.9/0.4=12.25 Where did 8.17% in Martin's article come from?

Aegis

stphnstevey wrote: »

4.9/0.4=12.25 Where did 8.17% in Martin's article come from?

I've corrected my post. It should be 4.9/0.6, not 0.4. My bad!

nrsql

>> However, the cash must be left there for at least three years
Not true. You can withdraw tghe cash at anu time. In the first year you will receive no interest. After that interest is accrued monthly. The interest rate increades over the 3 years so you will not get the stated interest rate if you cash in before the 3 (or 5) years are up but it will still be tax free.
Really it's an investment for people who can tie their money up for at least a year not necessarily 3 years.

If you let the investment roll over into the next issue then you don't have to wait another year.

poppy10_2

Until last year it was RPI+ 1.35% - giving an effective rate of 9.25%!

Wish I'd invested more than £10,000 back then. Didn't realize how much inflation was going to soar.