MSE News: Post Office to launch inflation-beating savings
Comments
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Simple interest is merely interest on which interest isn't paid. It might be paid out annually (for the investor to do with what they wish) or it might not.
EDIT: SnowMan makes a good point at post #3. This account does not guarantee to beat inflation. The article suggests it will ("non-taxpayers are guaranteed to beat inflation").
Even if the interest isn't taxed (leaving this to one side in other words) if RPI is around 8.5% (or more) for the five year term then this won't beat inflation. (Because it is simple interest and not compounded.) Happy to post the maths if anyone wants it.
The Post Office should not claim that it will beat (RPI) inflation. And the MSE article should definitely point this out!0 -
Now we're getting there.Even if the interest isn't taxed (leaving this to one side in other words) if RPI is around 8.5% (or more) for the five year term then this won't beat inflation.
What would the AER be if RPI was 5% for the 5 years. Not 6.5%! They're managing to hide the non-compounding con by not having to quote an AER because it's a structured product.0 -
There's two issues here. One is that it pays simple interest. As I say, take it or leave it. Hardly a con.
The other is that by linking the interest to RPI, it could be inferred that it will match/beat inflation.
I've just looked on the PO website and it isn't advertised yet. The only reference I've seen to it being an inflation-proofed product is on MSE.0 -
If they wanted it to match inflation, plus have a 1.5% bonus each year (min 1.5% per year), they should have done the growth in the RPI between the start and the end (floored at zero), and added a 7.5% bonus. That way, only the 1.5% interest would suffer the 'simple interest' phenomenon, and the rest would match inflation.
They've found a ruse, to make it sound like the same product, but made their cost of funds cheaper by buying an RPI 'cliquet' instead of an RPI 'tracker'. For some paths of RPI it will return more than an equivalent tracker (likely where there are at least one, and no more than four, years of negative growth in the five year period), but as you quite rightly say, it's not inflation-proof.0 -
If they wanted it to match inflation, plus have a 1.5% bonus each year (min 1.5% per year), they should have done the growth in the RPI between the start and the end (floored at zero), and added a 7.5% bonus. That way, only the 1.5% interest would suffer the 'simple interest' phenomenon, and the rest would match inflation.
On the other hand, with that system, by crediting all of the interest in a single tax year one might be pushed into a higher tax band.0 -
the YBS rpi linked version seems to say in the small print that you can withdraw the money early but will have to pay a penalty. i cant find what this penalty would be. can anyone help me find it? as if thats the case i may go for the annual income version then run away when better stuff is available. maybe the PO has a way out aswell?
best regards
p0 -
the YBS rpi linked version seems to say in the small print that you can withdraw the money early but will have to pay a penalty. i cant find what this penalty would be. can anyone help me find it? as if thats the case i may go for the annual income version then run away when better stuff is available. maybe the PO has a way out aswell?
best regards
p
From t&c - not specific on fees but does confirm you would be returned less than your initial investment:
What should I consider before investing?
Please note that the Plan is intended to be held until the Plan Maturity Date. You should have enough emergency funds elsewhere as the Plan is not designed for Early Termination.
Early Termination of the Plan will result in an Early Exit Fee (except in the event of death) and so you may get back less than you initially invested. The amount you will get back will not be greater than your Initial Investment regardless of the performance of the Index at the time of Early Termination.0 -
I was looking at the t & c this morning and also noticed the lack of any info on the Early Exit Fee. It does say that you may get back less than your initial investment. I don't like phrases like that.
It looks like Credit Suisse sell the product through Yorkshire (who take 4% of deposits as commission!). Nice work, if you can get it.
I spoke to a man at Yorkshire this morning who said he would phone me back with info on the Early Exit Fee. How they are allowed to sell a product like this without clarity on this, I don't know.0 -
It's on the Post Office site now: http://www2.postoffice.co.uk/finance/savings-investments/inflation-linked-bond
They quite rightly call it 'inflation linked' rather than making any reference to inflation proofing your savings. You're also locked in for at least a month at 2.5% before the product kicks in.
As far as structured products go, it's not bad, but if I had money to lock away, it wouldn't be going in one of these.0 -
The early exit fee will depend on their cost to unwind the product with their hedging counterparty. It will depend on all sorts of market factors like movements in RPI futures and the LIBOR yield curve. Much too complicated to put in the brochure.
Rest assured, the hedging counterparty will rip them off to do these unwinds as the amounts will be small relative to the size of the hedge, and the Post Office won't care what the cost to break is as they will pass all the costs onto the customers. In short, if there's any chance you will need the money, don't open it!!!0
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