Well, I am back online following my recent tour of the West country (boringly work related I'm afraid), and the fan fare this morning is the return of National Savings Index Linked savings certificates as promised by the Chancellor - George Osbourne in his most recent Budget speech.
Mentioned a few times in this blog (see earlier post: Budget Musings / NS&I Index linked savings) I have traditionally used them in the past to supplement savings as they provide a tax free return (previously over 3 and 5 year terms) of RPI + a tiered level of interest over the selected term (e.g +0.95% in year 1, 1% year 2 etc) which has been a very useful supplement once cash ISA limits are exhausted as up to £15,000 can be invested in each issue.
Not quite as flexible as some ISA's, the investment is for a term and generates RPI + % as stated but money can be withdrawn if required.
However, if this is inside the first year then no interest will have been gained but once the certificates have been held longer than 12 months you are in the money, so to speak.
But, obviously aware that they are likely to be popular and quickly subscribed to the max. I notice that, at RPI + 0.5% and 5 year term, the "headline" rate and holding term is perhaps not as a attractive as most recent subscribers may have anticipated.
The tiered rate to achieve the compound 0.5% that is added to the RPI are: Yr 1 +0.25%; Yr 2 +0.35%; Yr 3 +0.4%; Yr 4 +0.65%; Yr 5 +0.86%
With the Retail Price Index currently at 5.3% this would still provide a useful 5.8% tax free which in a box standard tax deducted savings account would be equivalent to 7.25% for a basic rate tax payer and a hefty 9.6% for a higher rate tax payer!
A few things to note though:
- An investment in NS&I does not affect your ISA allowance. This would be the same for an investment in premium bonds and other NS&I products with the exception of an NS&I ISA of course!
- Any investment in NS&I is 100% backed by the government as opposed to the £85,000 that applies elsewhere.
- At maturity investments can also be rolled over without affecting the take-up of any new issue.
- Inflation can fluctuate as it has done particularly when "manipulated" by the basket of goods and interest rates.
But, even allowing for the so called negative inflation numbers that were quoted during the last few years, the RP element of the certificates stops at zero which means that previous issues still yielded 1%/1.05%/1.35% dependent upon issue, which was still more attractive than the rate offered by those well known philanthropists - the banking industry (yes that also includes building societies etc).
- The headline rate of RPI (which includes council and mortgage costs), is quoted as a year on year rate so, at 5.3% it means that prices are up 5.3% relative to the level 12 months previously So in calculating what you will actually get you need the most recently published index figure to provide your starting basis.
And, despite being for the period to the end of March, 5.3% is the most recently published headline figure as there is a consistent lag between for calculation and publication. But, the index figure that 5.3% is drawn from might be 232.5 which would be 5.3% up on the same period 12 months ago i.e. 220.8.
If RPI in 12 months time is still 5.3% (who do you believe?) then the index would increase to 244.8 (232.5 *1.053) and you would have achieved 5.3% + 0.35% for the first year of your investment.
Probably, not the most popular product in the past due to a lack of understanding, the investment term, or just being too safe and boring, but they have at least provided some competition in the market for savers investments.
This is competition that has been sorely missing for most of the last few years and depending which source you read they were withdrawn because either: the government couldn't afford the payments; or the banking sector complained that savers were moving their money into NS&I rather than keeping them in the generously yielding products that Banks and Building Societies were offering.
Hmmm, as NS&I investments effectively serve as a loan to the government, and they could have closed one issue and started another with a lower rate of interest, I know which one I choose to believe.
So a useful tool and one that has served me well in the past as for some time now I have also sought to maintain a balance of low risk cash based investments in interest paying products.
One of the philosophies of Benjamin Graham (often referred to as the father of Value investment and teacher/mentor of Warren Buffett), was to maintain a balance of Fixed Interest (e.g. long term bonds etc) and stock market based investments.
The balance would begin at 50/50 with a view to re-balancing on an annual basis however the imbalance occurs.
Quite clever really because it mitigates risk in either of the investments and with the products tending to run counter cyclical to each other you should be moving some cash out an investment during a good period in preparation for an inevitable downturn (and switch) into the "opposite" style of investment. You might miss out on some gains in the short term but would probably catch that back with early gains/reduced losses in the switch.
Similarly, as the rule is set before hand it should be a mechanical re-balance rather than an emotional tussle of should I / shouldn't I.
I have to admit at this point that I don't automatically do it this way but I have managed to maintain a close balance between my chosen categories of ISA/NS&I/savings accounts.
Either way it ensures some diversification and that all your eggs are not in the same basket!
If you are considering them, they are likely to be popular, but I have no idea what kind of availability period that that would equate to.
Not sure at this point if I will take this issue up but I do applaud their re-introduction and the additional choice/competition that they will provide. I also hope that this will be the first of many. If nothing else it might, just might, provide another indication of normal service being resumed on the long road to recovery.
Related articles/links:
This article was posted 2012-09-06, but it reads like a Spring 2011 article (& the article url indicates 05/2011). Have NS&I really announced a new offering, or has there been a bit of a blog snafu?
ReplyDeleteHi SteveK,
ReplyDeleteNo it is not correct. Something has gone snafu as you say. I have labelled all the articles this morning and this looks to have gone awry so I will take it offline and try and put its original date back in.