How do NS&I Index-Linked Certificates work?
|Saving | National Savings
Asked by lloydsilver, submitted
23 June 2010.
Could you explain how National Savings Index Linked Certificates work. Investment articles I read seem to recommend them but am I right in saying that investing today whilst the RPI is high may not be such a good idea.
If you believe that inflation will go down and that the RPI will be lower in 3 years time than it is today then I believe you would only get 1% interest albeit tax free. Its possible to get more than that elsewhere.
Bearing all this in mind would you recommend them at this time?
Answered by Justin on 24 June 2010
Of course, they work like this:
You invest a sum of money between £100 and £15,000 for either 3 or 5 years.
At the end of each year interest equal to inflation over that year, as measured by the change in the retail price index (RPI), is added to your investment along with 1% extra interest (the extra interest is actually lower than 1% in earlier years and higher in later to encourage you to hold for the full term, but it averages out at 1%). All interest is tax-free.
For example, if RPI increases by 3% over a year and you’ve invested £1,000 then interest of £30 will be added along with an extra £10.
You’re right; RPI is expected to fall, although next January’s VAT rise should give a small boost. What’s key is whether prices (RPI) fall below their level a year ago.
If so the annual change in RPI would be negative (‘deflation’) and you’ll only receive a 1% return on index-linked certificates for that year - £10 in the above example.
If prices fall, but remain above levels a year ago then the annual RPI change will also fall but remain positive, so you’ll still enjoy a return above 1% on the certificates for that year.
Hard to predict what will happen over the next 3 or 5 years, but I doubt we’ll see continual deflation. Given interest rates look likely to remain low I think NS&I index-linked certificates are worth considering for a portion of savings if you’re a taxpayer. There’s no guarantee you’ll beat cash ISAs, but I think they’re a sensible way to hedge your bets.
At worst case you can get your money back before maturity. The caveats being: no interest is added before the first anniversary and the extra interest will be less than 1% in earlier years. But you will benefit from any positive change in RPI plus the extra interest pro-rated for each complete month held since the last anniversary date – it will be added to the previous anniversary value.
For reference, the extra 1% annual interest is added as follows:
3 year 20th issue certificates (0.85%, 0.95%, 1.21%).
5 year 47th issue certificates (0.75%, 0.85%, 0.90%, 1.15%, 1.36%)
You might find the National Savings page in our savings section helpful.