Friday 27 August 2010

Alternatives to NS&I Index Linked Savings Certificates? – July 2010 Update

The Retail Prices Index (RPI) is currently sitting at 4.8% while the Consumer Prices Index (CPI) is at 3.1%. It is highly likely that if you are holding any cash in bank accounts that you are therefore seeing your hard earned cash being slowly devalued. I know I am. Firstly let’s look at my chart for today. This shows that if you’re prepared to lock your money up for greater than 2 years then on average you can get around 3.7% gross. If you’re a 20% taxpayer then that means a net return of 2.96% and if you’re a 40% taxpayer then unfortunately your net return is 2.22%. Both of these values are less than both the CPI and the RPI meaning on average people’s savings are still being eroded. Provided inflation keeps tracking at these types of year on year percentages then the average rates after tax seem to be well behind the deal that was being offered by NS&I Index Linked Savings Certificates (ILSC’s). If you’re not sure how the returns were calculated on ILSC’s then have a look here.

If you’re not prepared to lock your money up then gross you are going to be averaging 0.77%. The average 20% taxpayer then ends up with 0.62% net while the average 40% taxpayer receives a derisory 0.46% net. That is a long way from inflation meaning a significant negative real (after inflation) interest rate. Is it any wonder people don’t save in this country! So what about if you hunt around for the best deal. Looking at MoneySavingExpert shows accounts paying up to 5%. After tax unfortunately you’re still going backwards compared to the RPI. However I’m staying well away from this sort of account because I hate complicated terms and conditions. The 5% account for example only pays this on the first £2,500. Anything above this receives no interest. Instead let’s have a look at the best ‘clean’ account, which is one that plays no tricks like introductory bonuses or withdrawal penalties. The best is paying interest of 2.65%. So again provided inflation keeps tracking at these types of year on year percentages all of these offers after tax seem to be well behind the deal that was being offered by NS&I Index Linked Savings Certificates.

National Counties Building Society was trying to offer a product which looked a little like NS&I ILSC’s called the Index Linked Cash ISA. I’ve just checked though and they are now saying that due to high demand this account has now been withdrawn. I decided not to go for this account as it would have eaten into my ISA allowance and I wanted the whole £10,200 available for Stocks and Shares this year. ILSC’s in contrast used to be another tax efficient savings place outside of my pension and ISA where I could place up to an additional £30,000 (£15,000 per issue) at a time away from the tax man. When I had a quick glance I also didn’t like the fact that the key features stated that they were allowing “no withdrawals prior to maturity” which was the 01 October 2015. I never did get as far as the terms and conditions to find out what “no withdrawals prior to maturity” meant. I don’t like lock ins like this, you just never know when you might need access to YOUR money. Who knows though, National Counties called the product 2nd issue, maybe there will be a 3rd issue which could be worth looking at. Even better maybe ILSC’s will make a comeback.

For now it looks like my cash is destined to earn a negative real (after inflation) return. As always do your own research.

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