Tuesday, 28 September 2010

Bank of England really does want to punish savers – NS&I Index Linked Savings Certificates Mature

So Charlie Bean, Bank of England Deputy Governor, has now confirmed what I suspected all along. They definitely wanted to cut the incentive to save when they decided to bail out the reckless with their 0.5% rates, which they then thought would give all those savers an incentive to go out and spend those savings. What sort of crack pot notion is that? Hey everyone you’re now going to earn no return on your money so why not just go out and spend it all! Well I for one am not taking that advice. I can think of many reasons but how is this for a few:

- I never know when I might lose my job and so might have to survive for many months before finding a new one.
- I never know if I might become ill and so need some savings to tide me over.
- One of my family or friends could need my help due to either of the above.
- I don’t believe a state pension will exist by the time I am at the end of my life and even if one does it would be about sufficient to allow me to buy baked beans and toilet paper only. I therefore fully intend to support myself when I no longer want to work so I am not forced to live in poverty.
- I don't want to work until I'm dead.
- Someday soon I might want to “retire” to take up a new career that I might enjoy more with less stress, learn something new, undertake some charity work or if I choose just sit on a beach drinking margarita’s.

So with the above in mind I’m going to ignore Mr Bean and find somewhere to invest (save) my tranche of 3 year NS&I Index Linked Savings Certificates that are maturing next month. A £10,000 investment into the 3 year certificates, which were Issue 15 at 1.35%+RPI, has returned £11,408.49 which is a compound annual growth rate (CAGR) of 4.5% however it gets better than this. Remember the “interest” is paid tax free so I would have had to earn 7.5% per annum as a 40% tax payer to do better than this. For a “risk” free investment I believe I wouldn’t have beaten this.

As I’m sure you are by now aware Index Linked Savings Certificates are no longer available for now however with maturing certificates you still have some options.  As this is the first time these funds have “matured” I can:
1. Invest in 2 year fixed interest savings certificates paying 1.25% AER
2. Invest in 5 year fixed interest savings certificates paying 2.25% AER
3. Invest in 3 year index linked savings certificates paying RPI+1% AER
4. Invest in 5 year index linked savings certificates paying RPI+1% AER
5. Take the money and place it elsewhere

So it’s good to know that even though index linked savings certificates are no longer available you can still reinvest into them. Unfortunately it looks like you can only reinvest once. There does however also look to be another benefit to reinvesting that I wasn’t aware of. According to NS&I’s guide “What are your options at the end of a term?” “if the rates on offer go up between the date of your letter and the end of your Certificate’s term, we promise to pay you the higher rates.

So what have I decided to do? Well I have a little time to decide but I can say that it will definitely be option 3 or 4. What I’m trying to balance is when houses might start to become affordable again, at which time I’d be looking for a big deposit, which makes me lean towards the more conservative 3 year certificates. In contrast to this with a fair wind I’ll be looking to “retire” in 5 years which would make the 5 year certificates attractive for my first “retirement” income.

What reasons do you have for not spending all your hard earned savings?

As always do your own research.


  1. "What sort of crack pot notion is that?"

    This stuff is basic monetary policy! I'm kind of surprised anybody is surprised about it.

    What exactly /did/ you think they lowered the base rate for?

    -*- Lemondy -*-

  2. Hi Lemondy

    "What exactly /did/ you think they lowered the base rate for?"
    Thinking a little differently could it actually have the opposite affect.

    Let's say I'm a pensioner and I know whatever savings I have need to last me for the rest of my life. I'm therefore reluctant to eat into my capital. When the return I earn on my savings is cut then I go into "austerity" mode and also cut back a lot meaning less money going into teh economy.

    On the other side of the fence I'm now heavily indebted. Interest rates are cut to supposedly get me to go out and spend as my interest bill is less monthly. However the banks instead of lowering my interest bill a lot they just increase their spread so that they can rebuild their balance sheets while giving me a little break. I can then go out and spend a little.

    So the pensioner is spending a lot less while the indebted is spending a little more. Net result less spending in the economy.

  3. That all seems reasonable but how many pensioners are in the position of living off the income from cash savings as pc of the population? I doubt the effect is significant on the economy. Most pensioners live off annuities and/or the state pension; those with real wealth do not hoard it in cash.

    The effect on everybody else is surely much more significant (disincentive to save, lower mortgage rates/business borrowing rates, etc etc)

    -* Lemondy *-

  4. the 5 year option looks better than the 3 year option since you can weithdraw at any time should your house requirement appear, and you lengthen the cycle time, which if NS&I are thinking of canning the RPI certs and switching to CPI would be a hit on your cash.