It has been a little bit of a faff and my recent adventure didn’t help but as with Salis Grano and Ermine I now have in my possession Issue 48 NS&I Index Linked Savings Certificates which offer index-linking to RPI plus 0.5% pa compound if held for 5 years. Unfortunately I wasn’t able to buy them on the day they were re-issued for 2 reasons:
- Following my overseas adventure I had to update my address details with NS&I. This is quite a clunky process and takes a few days as it can’t be done via internet or telephone. Instead I had to send off a signed letter requesting my details be changed which took a few days for them to process.
- I had to transfer the funds from my online savings account into my current account which takes the usual 3 days. I still can’t believe that in 2011 it takes 3 days to move money electronically. In fact, yes I can, because we all know that this limbo period is where the banks hold on to your money and not pay you interest on it. A nice little earner I’m sure. What was also interesting was that my online savings account provider very quickly sent me a survey saying that I had recently moved a large sum of money from my account and they would like to understand why. I’m amazed that they have gone to the trouble of paying somebody to set up a survey. Surely the answer is always going to be because “I want to buy something” or “your rates are uncompetitive”. Funnily enough they didn’t have an option that said “moving money from poor insulting interest rate to NS&I”.So once that was all sorted out I tried to buy online but for some reason the website no longer likes my postcode even though I have bought many Index Linked Savings Certificates in the past. So it was on to the phone and I can say they either don’t have enough staff or this issue of ILSC’s are proving extremely popular. It took me a long time to get through but once I was finally speaking to a human it took about 2 minutes and the certificate arrived in the post a few days later. So the back end of their process is efficient.
I’m now starting to think about whether these certificates are going to cause the banks to up their game a little and maybe start paying savers a more sensible rate. As Monevator rightly pointed out the UK government in 2011 is trying to borrow £2 billion through NS&I. What’s interesting is that NS&I estimate that to get that £2 billion they actually need inflows of some £14 billion. Now of course we don’t know how much of that £2 billion is coming from Index Linked Savings Certificates but given that in 2010/11 they only raised £300 million it’s not too much of a leap of faith to suggest a large majority is coming from Savings Certificates which includes both Index-linked Savings Certificates and Fixed Interest Savings Certificates.
NS&I freely acknowledge that they withdraw Savings Certificates “from general sale in July 2010 due to exceptional demand which risked NS&I exceeding its Net Financing range for 2010-11”. Running a quick extrapolation of £300 million versus £2 billion suggests that last year inflows may have been around £2 billion. That means that there is new competition in the market trying to acquire an additional £12 billion. Where is that going to come from? Again it’s only theory, but I’d suggest that the majority will be money that would have otherwise ended up in bank accounts. It certainly is in my case. Where would your ILSC money have ended up if they weren’t available? Let’s run a straw poll.
With this in mind supply and demand should suggest that the banks should need to start offering a more competitive deal if they want to keep our money. I’m therefore going to revive my chart that shows the average rate on savings accounts to see if any effect can be seen over the coming months. Of course it’s too early to see anything yet but today sets the benchmark rates to track from here.
Firstly, the red line which is defined by the Bank of England as the monthly average of UK resident banks sterling weighted average interest rate, interest bearing sight deposits from households not seasonally adjusted. As with previous reviews of this data set I’m interpreting that as current accounts and instant access savings accounts. The average rate being paid as of April 2011 is 0.92%. At this rate the 40% tax payer ends up with a real return of 0.55% and a 20% tax payer 0.74%. It’s derisory compared to current returns from NS&I Index Linked Savings Certificates.
If we then look at time deposits we have the blue line which is the monthly average of UK resident banks sterling weighted average interest rates for new time deposits with a fixed original maturity of <=1 year from households not seasonally adjusted which today is giving 1.86%. Similarly, the olive line is the same but for >1 year but <= 2 years and is achieving 3.08%. Finally the purple line is >2 years and is today achieving 3.62%.
It will be interesting to see if some new competition can force the banks hands. Of course there are a multitude of other effects which could cause interest rates to rise as well but let’s discuss those as they occur.
So where do I sit today with the low risk portion of my Retirement Investing Today portfolio. Well NS&I are well in front with 21.2% of my assets compared to the banks who now only hold 9.2%.
As always DYOR.