Do you have any NS&I Index-linked Savings Certificates? Are they approaching maturity? Are you wondering what to do with them?
The product’s attractions have deteriorated in recent years, so renewing your certificates may not be the no-brainer it once was.
On the other hand, inflation is back and proving stickier than a toddler wielding jammy doughnuts. And if that’s a concern for you then there are still good reasons to keep even today’s atrophied Index-Linked Saving Certificates in your portfolio.
Let’s recap the main features of Index-Linked Certificates. We’ll consider the pros and cons of renewal after that.
How do NS&I Index-linked Saving Certificates work?
National Savings and Investments’ Index-Linked Saving Certificates are a unique fixed-term savings product.
The important features are:
Protection against inflation – Index-linked Savings Certificates safeguard your savings from inflation. The amount you have in them grows in line with the UK’s Consumer Prices Index (CPI), maintaining your purchasing power as prices rise.
Deflationary floor – Unlike index-linked gilts, your certificate’s value will not shrink if the index declines during the term. Instead, your savings’ nominal value remains unchanged if deflation occurs. In fact it will actually grow in real-terms and you’ll still receive interest on top.
Tax-free – Both the inflation-linked returns and the fixed interest are exempt from UK income tax and capital gains tax. Certificates’ tax-free status means they don’t take up room in your ISA or SIPP nor eat into your personal tax allowances. You don’t need to declare them or do any tedious paperwork.
Government guaranteed – National Savings and Investments is the UK government savings bank. Consequently, Index-linked Saving Certificates are as safe as investing gets because they’re 100% backed by HM Treasury.
You cannot lose money – Index-linked Savings Certificates are not potentially subject to capital losses, unlike bonds. In this sense they act like other cash savings products.
Fixed terms – Your money is locked up in Index-linked Saving Certificates for fixed terms of two years, three years, or five years. (Two-year terms are only available if you roll over an existing two-year certificate.)
Fixed interest rate – Currently you get 0.01% on top of the index-linked inflation adjustment. This is a fixed rate that is guaranteed not to change during your term.
No longer available – You can only renew existing Index-linked Saving Certificates when they mature. The Government hasn’t made new issues available since 2011! It shows no sign of changing course. This means Certificates can’t be replaced if you cash them in.
NS&I index-linking explained
With Index-linked Saving Certificates your savings are adjusted each year – on the anniversary of your investment – in line with movements in the CPI index.
The fixed interest is then calculated on your inflation-adjusted savings (not the original amount).
In this way both capital and interest keep pace with inflation.
Index-linking is applied annually, and is reinvested into your Certificate to compound over the term.
There’s no annual payout: you receive your initial savings + index-linking + fixed interest at maturity.
Here’s a quick example of how index-linking works:
CPI index = 100 (Index figure two months before the start of your certificate’s investment year.)
CPI index = 105 (Index figure two months before the end of your certificate’s investment year.)
105 – 100 / 100 = 0.05 (5% rise in CPI inflation over the last 12-months.)
The formula for the percentage increase is:
New index figure minus old index figure / old index figure * 100.
Your savings grow by the index-linked amount:
£1,000 * 1.05 = £1,050
Plus 0.01% fixed interest:
£1,050 * 1.0001 = 0.105 (10p)1
Total = £1,050.10
As you can see, the interest rate is now derisory. But the index-linking makes a considerable difference when inflation is high.
How have NS&I Index-linked Saving Certificates features deteriorated in recent years?
No early access – You’re now completely locked in to your Index-linked Saving Certificate for the entire fixed period if its term began on or after 23 July 2023. If your Certificate’s term started before 23 July 2023 then you can cash in the product early – in exchange for the loss of 90 days’ interest and that investment year’s worth of index-linking.
If your old-style Certificate allows early access then do it as close as you can to your “anniversary date.” At that point your index-linking is added and a new investment year starts. Thus if you cash in a month after your investment year begins, you’ll only lose a month of uplift. Cash in one month before your anniversary date, and you’ll lose 11 months of index linkage.
Index-linked to CPI not RPI – The inflationary uplift used to be linked to the Retail Prices Index (RPI), not CPI. RPI inflation is typically higher than CPI, but this older measure is gradually being phased out in government and across a range of financial products.
Terrible interest rate – The interest rate has progressively worsened and is pretty much irrelevant today. But that doesn’t mean you should necessarily ditch your saving certificates, as we’ll see.
What are my choices when an Index-linked Saving Certificate matures?
It’s pretty straightforward:
- You can let it automatically roll over into a new Certificate of the same term
- Or select a different term, as long as it’s either three-years or five-years
- Or take the money and run
You can also withdraw some of your money while reinvesting the rest.
Splitting your reinvestment money between different terms is also an option. The minimum reinvestment amount is £100 per Certificate.
What you cannot do, sadly, is invest any new money.
NS&I Index-linked Saving Certificates interest rates
Index-linked Saving Certificates offer a 0.01% fixed interest rate, regardless of which term you choose.
That’s a pitiful return. But it’s better to think of it as a:
Tax-free, inflation-matching rate + 0.01%
To contextualise how good that can be, remember that CPI 12-month inflation was 10.5% in December 2022.
- A non-taxpayer earned 10.51% on their Index-linked Saving Certificates during that period
- So a basic-rate taxpayer required an asset yielding 13.13% to match that rate
- A higher-rate payer would have needed a 17.52% return to keep up
You couldn’t get that from any bank account. Indeed you couldn’t get it from equities either. They posted a loss that year.
Inflation has subsided since 2022 but it hasn’t gone away. Inflation can also flare up shockingly fast – despite lying dormant for decades – as the post-Covid inflationary surge taught us.
Are NS&I Index-linked Saving Certificates a good investment?
A good investment should hit as many of these bases as possible:
- Offer the potential for real returns2
- Play a valuable role in your portfolio
- Diversify your sources of risk
- Be low-cost, transparent, and easy to understand
- Protect your wealth during bouts of inflation or deflation
When measured against these criteria, Index-linked Saving Certificates are a fantastic investment.
They do provide a real return, though at 0.01% a year they only just break even against inflation.
Indeed, other major asset classes have historically offered better returns than 0.01% over the long run.
But the crucial difference is that the Index-linked Saving Certificates’ real return is guaranteed. Cash locked up in Index-linked Saving Certs will match inflation every year.
In contrast money market funds posted a real-terms loss nearly every year from 2009 to 2023 (inclusive, with the only exception being a tiny win in 2015).
Most bank accounts failed to keep up with inflation during that period, too.
Meanwhile, equities, bonds, gold and every other asset class you care to mention are volatile. They can be struck by bear markets that last for years on end.
Whereas from the perspective of a diversified portfolio, Index-linked Certificates are completely unaffected by and uncorrelated with whatever is rocking other assets’ world – for good or ill.
Inflated expectations
Straightforwardly, the truly invaluable role that Index-linked Certificates play in your portfolio is as an inflation hedge.
Very few assets properly hedge inflation. And the best alternative – index-linked gilts – is much more complicated.
High inflation is a deadly foe and NS&I Index-linked Saving Certificates counters it on unbeatable terms. No other inflation hedge can give you a guaranteed real return with no capital downside along the way.
Of course, there’s every chance that inflation could fall away and interest payable on ordinary savings accounts offer a greater return over the next five years.
But that is not the point.
The idea with insurance is to take it out before you need it. And these Index-linked Certificates neutralise inflation – as well as deflation – like no other asset.
Nobody knows what inflation will do in the years ahead, which is why central banks frequently misjudge the risk. Yet here we have a super-safe inflation-defeating device that will preserve your spending power.
All for no fee!
Add in the completely tax-free returns and also their simplicity, and it’s easy to see why existing Certificate holders are loath to give them up.
Final verdict: should I renew my Index-linked Savings Certificates?
| Renew NS&I Index-linked Saving Certificate if… |
|---|
| You want inflation-proof, tax-free, risk-free capital protection. |
| You’re risk-averse, or you want to offset equity / bond risks elsewhere in your portfolio. |
| You can commit for three to five years with no access needs. |
| You value peace of mind more than investment performance. |
| Consider alternatives if… |
|---|
| You want higher nominal returns and can take the risk you may not get them. |
| You might need access to your funds. |
| You strongly believe inflation will be low over your term (and beyond?) |
| You have plenty of alternative tax shelters. |
In short, renewal makes sense when you prioritise stability, tax-efficient wealth preservation, and safety over yield and liquidity.
Bonus sections: certified details
Here’s a couple of additional sections: on the likelihood of new Certificates being offered again to savers, and what happens if you die while holding them.
Are NS&I Index-linked Saving Certificates coming back?
It’s possible that Index-linked Saving Certificates will return. After all, they were first introduced in 1975 to help protect retirees from the ravages of inflation.
However new issues were heavily oversubscribed in the wake of the Global Financial Crisis. Not surprising when bank rates crashed, inflation picked up, and the solvency of commercial lenders was being questioned.
In that perfect storm, real yields on UK Government debt fell into negative territory and it was ultimately cheaper for HM Treasury to raise money via the bond market than through its consumer-orientated NS&I operation.
But the picture has changed since 2022, with yields rebounding.
Two- to five-year index-linked gilts now offer real yields of 0.1% to 0.6%. That’s notably higher than NS&I Index-linked Saving Certificates’ real yield of 0.01%.
In theory then, space has opened up for the Government to issue new Index-linked Certificates. However there’s no word on whether it intends to, nor any obvious political appetite to assist savers against high inflation.
It’s plausible this ongoing lack of fresh availability implies the certificates are so attractive that new issues may still overwhelm NS&I’s fund-raising targets and outcompete the commercial market.
That alone should give you pause before you cash them in…
NS&I Index-linked Savings Certificates on death
Certificates continue to earn tax-free index-linked growth and interest after death.
However, the Certificate falls into the estate of its last remaining holder upon their death and so may be subject to Inheritance tax.
Joint certificates continue to be owned by the surviving holder in the event of their partner’s death.
If you inherit an Index-linked Savings Certificate then it can be transferred into your name.
You should be able to claim the money instead if you so wish. See the NS&I form: Instructions to cash inIndex-linked Savings Certificates on this page.
NS&I lists the information it requires after a bereavement on its website. It accepts photocopies of the original Savings Certificates.
You can trace lost NS&I accounts here.
Note: we’ve updated this article to reflect the status quo in March 2025, but kept the comments below for posterity. Please check the comment date if anything seems odd.
I actually consider my holding of these as part of my emergency fund. I have about two years running costs in these, and that’s for deep emergencies – medical stuff or the like. Compared to chasing current accounts they as trouble-free and good for all the reasons you listed. I wonder if we will one day have a normal economy and these become available again, or it really is all different this time.
@ermine — Needs must I guess, but I wouldn’t use them as my emergency fund simply due to the one-way nature of the transaction. In your portfolio they seem more like a one-shot “power up” boost in a video game that you can’t replenish after you use them, compared to an emergency fund that you can dip into because the archetypal boiler blows up. 🙂
I’m in the same dilemma. Have maxed out current accounts and don’t know where to put the money. Might be used for a home so don’t want to risk it, but RPI + 0.01%… I just can’t help but think I can do better. I have a week before I have to choose….
very timely, i bought in 2011 as well and have the recent paperwork from ns&i sitting in my intray
nice to get your opinion and i’m sure several others will pop up in the thread
my 2 pence is that it is common to think about what will ‘make most’ in a portfolio and be swayed toward weighting those assets more heavily. it is less common to think along what will ‘lose least’, until, of course, you are sitting in the middle of a period when you are losing. then this way of thinking becomes obvious.
these certs fall into the ‘lose least’ camp.
that said, i’m thinking of getting shot and cashing in. my reasoning is simply i don’t hold enough in proportion to the rest of the portfolio for them to make any difference – they account for 0.8%, so not worth the admin for me. the loss of that .5% makes the decision even more easy
@TheRhino — You write:
Um, what admin? These have to be the most admin-lite investments I own. Even cash accounts generate more paperwork! 🙂
TI – sorry, not the right word to describe what I mean. I mean the brain-space to remember what I own. As a rule, I like to own as few things as possible. If I can get rid of something, then I do. NS&I certs for me aren’t performing any role as I hold too few.
Really, I need to scrap all my P2P for the same reason, or increase my exposure by a fair bit.
With NS&I I can’t increase my exposure, so my only other option is to get rid
Thanks very much TI for the excellent comprehensive review.
It may surprise some, but NS&I IL Certs represent about 25% of our liquid portfolio. So very conservative investors are we then!
Was built up long ago in the days when real yields were more attractive. Will only be drawn-down if stocks reached very silly low prices; and resources such as bonds and other cash were also running low.
Kind of a safety net then?
Have a specific problem with my 97 year old mother’s investments at present. Not wishing to be responsible for her taking stock risk, we encouraged her over many years to buy the NS&I IL Certs.
Her other assets are in Building Society Accounts, increasingly Instant Access.
So which should be used first?
The problem with the NS&I IL certs is the lumpiness of the maturities.
If maturing Certs are rolled over, the cash well may be needed earlier than the next maturity.
TI’s article has set me thinking about the option of timing sales for early in the respective investment year.
The Building Society Accounts are offering the pathetic usual current interest rates, so maybe should be drawn-down first?
Forgot to mention in previous post, mother is now in a Nursing Home with quite high ongoing charges.
@The Rhino — Fair enough. Must admit I’m the complete opposite. I would own 100 distinctive assets if I could (Ceteris paribus). I very often throw the towel in on some, but that’s because I’m greedy/inconsistent, and almost invariably because I want fodder for some share or another.
Edit: Actually this is blatantly an exaggeration on my part here. E.g. I own no UK government bonds currently, despite their very distinctive characteristics. Although it’s true I long ago flogged them to buy shares. Thanks for prompting a thought that’s revealed some cognitive dissonance here! 😉
@magneto — I wouldn’t presume to feel qualified to give any personal or specific advice pertaining to such an important responsibility. In general from what you’ve said though, it does seem like using the cash accounts to enable the optimal timing of turning-in the I-L Certificates might be an option to consider.
Well there we have it – I’m like a human incarnation of Occam’s razor. I find ownership exhausting, but I am also in inveterate saver – its a nightmare;) I’m really looking forward to getting the hell out of BTL.
I cashed in my index linked certificates when they matured last year and put money into ISA. Yesterday I received paperwork for 5 year maturing Fixed Interest certificate with option to renew but only 1.60% interest. Any thoughts ?
Others may offer some suggestions.
However their answer(s) may depend on what the rest of the portfolio looks like?
At first glance 1.6% nominal for a five year lock-in, does not sound attractive, esp if interest rates do one day rise. But then as TI pointed out with their IL cousins, there is an escape route.
People go on about the government’s generosity to savers with LISAs, Help-to-buy ISA, pensioner bonds, extra interest personal allowances, etc.
But then they forget that once every almost every year every person used to be able to invest £30,000 in ILSCs and get a government guaranteed real return a couple of per cent above inflation tax free
Makes me yearn for the days of the Sugababes and the Ford Sierra
Excellent article, agree with every word. Just under 20% of my total savings and investments are in these in about ten tranches ranging from a few grand to about 15 grand and dating back, in some cases, to between 10 and 15 years ago.
I’ve already had 4 or 5 tranches rollover so far this year. I have yet to cash any in, although I do think about it each time, for all the same reasons TI refers to.
I always think where would I put the money, especially as I’m already maxed out on the Santander 123 accounts, and having just retired at 60 I feel I have an almost sufficient percentage in the stock market (which is increasing anyway as I put the max £3,600 gross into each of his and hers SIPPs) and end up leaving them alone as I know they can never make less than RPI. I think I would only cash them in (possibly) if the government ever changed them to CPI (which I fear they will do one day) or if the stock markets tumbled by tech-crash or financial crash magnitudes.
But then I’d probably be too scared to do anything.
The good thing about having lots of tranches is that there is always at least one that rolled over in the last few months which could be cashed in with only a small penalty.
I don’t have any bonds, instead using these instead of inflation linked gilts and “high interest” (ha ha) savings accounts instead government/corporate bonds.
I dont have any of these certificates. The article was very useful to me because my starting point was: what is the point of such paltry returns? Yet by the end I did indeed see the benefits of these certificates, and their place in a diversified portfolio. So ive learnt something and its a good reminder (to me if nobody else) that this investment lark isn’t all about chasing the upside.
I have about 10% of my “portfolio” in ILSCs. They were bought ad hoc, a mix of 3 and 5 year certificates. Something rolls over most years so if I ever needed the money it’s accessible.
I treat these as my non-emergency fund cash buffer – I really can’t be doing with looking around every year for a “best buy” that then has a rate cut, plus the “is it / isn’t it?” tax element now that interest on bank accounts, etc, is gross but have the Personal Savings Allowance and the nil-rate band Savings Allowance.
RPI, guaranteed loss-free, tax-free, no hassle, 100% Govt backed works just fine for my “longer-term” cash holdings. I wouldn’t sell them, but I’m not sure I’d increase my 10% if they were available.
But who knows what inflation (or equities) will look like in a Corbyn/Trump/Putin/Assad/Kim world…
Well I am holding my completed envelope for cashing in, but… only as part of the plan to pay of the mortgage – otherwise as part of a portfolio i would lovingly keep them.
We’ve got 4 x £15k between the two of us that mature in August. Plan is to roll them over for all the reasons given above. I hope to *never* touch this as it’s part of our “equities have crashed” living fund to tide us over 2-3 years.
Hmm, can we roll over just 4x £15k or 4x what they are worth now?
You can roll over the whole amount.
I rolled mine over from 5 to 3 yrs. I thought it can’t be possible for the interest rate to decline! However, I suppose it’s possible they could be withdrawn altogether or changed to CPI next time.
I must be very, very cautious too, as I have around 20% of my portfolio in these certificates, but I started buying three-year certificates around 10 years ago to save for my children’s university fees (just in case ability to pay should become more important than academic ability; I certainly never paid private school fees). Now, thanks to that Martin Lewis chap, apparently most students borrow their uni fees (which is a different discussion altogether), so I appreciate your article and the wise comments here that it’s still worth hanging onto them.
@TI Thanks for a really great and timely analysis of these super safe if rather boring IL certificates.
Hilarious that you’ve managed to spice it up with a eunuch and a titchy cherry!
My mother won’t be rolling over this years tranche. I don’t have any, I prefer the thrill of a bond.
And they are heritable. You peg out, and ns&i will obligingly reregister them in the name of your widow, assuming that’s what you wanted.
I have 25k in their 5 year certificate, which will mature November 2017. As I’ll be looking to purchase my first flat towards the end of this year, I was thinking about cashing it (or part of it) in to help boost my deposit.
Would yourself or others recommend this, or would it be better to reinvest them and hold on to them for as long as I can? (I’m currently 23).
@Gaz — I don’t think anyone can tell you specifically what to do, it will depend on a whole host of your personal circumstances. We can explain how the different assets work and the pros and cons and so forth, but I can’t tell you what you should do yourself. Good luck!
@Minikins — You write: “I don’t have any, I prefer the thrill of a bond.”
We are a hotbed of adrenaline junkies here, eh? 😉
@all — Thanks for the comments, glad the article was useful.
@TI its like ALDI, they know what I need before I do, and there it is waiting on the shelves.
You have the same knack with the old monevator articles..
when i were a lad, i had some 5th issue index-linked certificates, which paid RPI + 4.5% (this is a bit like the 4 yorkshiremen joke in reverse) – and i didn’t even buy as many of them as i could.
i haven’t had any national savings certificates for a while, so no decision to make about them. no, i’m not jealous 🙂
@ggs: I remember an FT article of the time pointing out that after tax and charges, equities would have lost to ILSCs in most years since, I dunno, Methuselah. Maybe that’ll become true again.
@ Magneto – re: lumpiness, you can make partial withdrawals from the certs. Though you’d lose inflation linking on the whole amount for the year.
Inflation is a huge financial threat for retirees – though it doesn’t seem like it right now – and there’s no better tool against it than these certs.
@TA — I think @Magneto was referring to a question about the fixed income flavour of NS&I Certificates, not these Index-linked ones. 🙂
Totally agree with the rest of your comment, of course. If you could still buy the Index-linked flavour I’d definitely be investing in a few more.
@TI Thanks for the info, your “If you could still buy the Index-linked flavour I’d definitely be investing in a few more” comment told me all I need to know – I think I’ll try to hold on to them for as long as I can.
I’m a big fan of Index-Linked Savings Certificates.
When introduced in 1975 they were for pensioners only – a means to protect some of their cash savings or pension lump sums from the then high inflation. They were available to all ages from 1981.
To me they were a simple, tax-free, Government-backed way to retain the value (as measured by RPI) of part of my savings.
So I regularly bought small amounts over the years, and rolled them over. Now I’ve retired, I get index-linking on this part of my savings, which is important to me.
But I wonder if, when inflation is higher, HM Treasury will still offer index-linking on matured certificates.
I rolled mine over earlier this year, for much the same reasons.
In terms of asset allocation, should they be treated as bonds or cash?
@TA & TI
Apologies for the confusion.
Comment 13 re the fixed interest versions related purely to comment 12 from Bellabeck!
The “@Bellabeck” somehow was somehow overlooked.
To clarify, the Magneto family are only in the index linked variety.
That is why the article, is for us, so pertinent and timely.
This point and those in the article’s immediately preceding paras, so blindingly obvious in hindsight, had not fully registered in Magneto’s brain until TI elaborated in the article.
Only difficulty now is getting hold of Cash-In Early Forms from the NS&I web-site, as and when they may needed, probably a year or two down the line, (the forms no longer being mailed out on a regular basis).
@Comet
We consider NS&I IL Certs as Cash, due to lack of capital fluctuations with any market fluctuation.
However perhaps it does not really matter what they are called?
The most important thing is that they are not stocks!
For many investors there is a horror in holding cash, mainly due to the long-term ravages of inflation. But this inflation adjusted instrument seemingly overcomes that drawback?
@ Comet – They’re part of the fixed income part of your portfolio i.e. the bonds / cash component. They’re effectively short-term index-linked bonds. Ideally, you’d have a ladder of them – with one maturing every year that you could take to cover your annual income needs. If only life would be so neat.
Unfortunately I’ve read this a little too late – cashed my certificates in a few weeks back, which were bought in 2011.
@TI – I have just rolled over my one holding for the full five years for exactly the reasons you give. It ain’t going to make me a lot of money, but it is superbly defensive against an uncertain world – anyone got a reliable forecast about what happens to inflation and yields on other assets post the referendum?
This article is very timely as I’ve just received a notification letter from NS&I concerning some maturing ILSC. I’d completely forgotten that I had bought them and was convinced that I was the beneficiary of a fortuitous error until I eventually found the certificates filed in the most unlikely place. My question now is that I have a reasonably diversified investment holding but still have an effective lifetime fixed mortgage at 3%. Might I be better off paying down the mortgage penalty-free rather than rolling over?
Unfortunately, I wasn’t lucky enough to get any of the NSI index linked certificates before the Government decided to withdraw them.
Can anyone recommend an ETF or fund that could be used as an alternative?
What I’m really looking for is a short duration UK inflation linked gilt fund. (something passive and or low cost). All the ones I’ve found so far seem to have a very long duration (20 years) which is a bit too much interest rate risk for my liking.
@Humble Pie — Unfortunately, as I say in the article I don’t believe there is a straight swap alternative. To recreate something approximating the equivalent exposure one could aim to derive a collection of IL gilts, conventional gilts, and cash that offers roughly equivalent protection from inflation/deflation and on a fixed time frame, as best you are able.
But really that would just be an extension of one’s existing exposure to fixed income, rather than a distinct alternative-ish asset, so it’s a bit of a fabrication and not what you’re asking for I appreciate.
@Disorganised — I am loathe to give personal advice to most questions, but most particularly anything to do with paying down mortgages! Huge can of worms. (e.g. I had to close this thread here: http://monevator.com/not-paying-off-my-mortgage/#comments)
Generally speaking I would look at my overall portfolio mix versus my aims and goals, and my ability to meet my mortgage commitments now and in the future. Something may be expected to deliver an inferior return but serve some other purpose.
E.g. an Index-linked Cert is more liquid than a chunk of housing equity, but if you have a far larger existing cash holding sitting around then perhaps that isn’t a big attraction to keeping hold of them.
I’d also consider the “not making them any more” argument, especially if the amount you’ve got isn’t going to change your life by dramatically decreasing (and hence de-risking) your mortgage exposure. As discussed in a comment above, I have a soft spot for the idea of ad hoc investments that genuinely diversify a portfolio. But I do keep excellent records! 😉
I know this is years old but …
> Warren Buffet
I’m keeping mine.
And IMO it may be worth renewing any three year certs to five years as a hedge against the certs being further eroded or even cancelled on their next maturity.
I gave up with these last time they reached maturity. First CPI + trival percentage didn’t look good, instead of RPI+. Now lets look at the truth about CPI, that a general level of inflation given by the ONS, there are other inflation figures, CPIH, and so on. Maybe the one that should be of concern is Home Owners inflation which doesn’t stand at 3.1%, but is more like 8%. Food inflation is in the region of 11%, and energy inflation we are seeing a 6% increase in the coming quarter. When you think on it 3.1% CPI rail fares, phones, mobiles and other things are allowed to increase by CPI+1.25% we are always chasing much greater than the 3.1% CPI, Fact is Pensioners are faced with food inflation and energy inflation as basic needs in the current climate CPI is no where near sufficeint.
Husband and I have a shed-load of these, all bought when you could cash ’em in early if required. I’m now in my 60s and husband is significantly older than I, so I’m not keen on the idea of having all that money tied up for fixed terms.
As luck would have it, 4 of husband’s certs matured in quick succession recently, while we were having substantial renovations and improvements done to the house – so we were able to use the cash for that and didn’t have to trouble our ISA funds.
As I understand it, NS&I is under no contractual obligation to release the cash early on death of the cert holder, and has said it may do so but only at its discretion. That sticks in the craw for me, given our ages, and so we are cashing ours in as they mature. As always with such decisions, personal circs are key and one size does not fit all!
I’ll probably cash my ILCs in, in favour of linkers which I’ll hold to maturity. (But for some bizarre reason I do feel emotionally attached to ILCs )
@JPGR — I feel a similar attachment to my small holding of Certificates. I suspect it’s because you can’t get them anymore. Plus they are now easily my longest continually held investment!
@HazeyJane — Hmm, age is perhaps worth pulling out as a reason to consider cashing-in, cheers for sharing. It follows from the motivations we do highlight, but given the likely demographics of Certificate holders it’s clearly highly relevant!
I’m going to cash mine in May.
They are about 1.5% of my overall portfolio so only a token hedge against inflation which I can’t cash in should I need to access cash instead of equities due to a market crash. Also as said recently above CPI is not the level of inflation I am feeling in the real world. Lastly whilst I enjoyed the 10.5% in Dec22 the growth over the years I’ve held them is nice but not going to change anything.
Perhaps if I could buy more to increase my pot size then the inflationary protection would become material to me overall.
JG (#45):
Re “Now lets look at the truth about CPI, that a general level of inflation given by the ONS”
Indeed, you should e.g.:
As of Jan ’25 (latest figs available from ONS) food was 3.1% not 11%; energy was -9.9% and not 6%. Also, owner occupier housing costs (aka OOH) [@8% in Jan ’25] and part of just the CPIH (ie not part of the CPI) is not the same as Home Owners inflation either.
Agree that [regulated] increases of CPI plus is not good – says a lot IMO about the regulators!
OOI, when you gave up on your ILSC’s last time they matured did you replace them with anything?
Our four are now worth close to £100k between then. They mature in August 2026, but of course there is now no access until maturity, so the idea is to slowly trickle them into our ISAs and maybe build an unwrapped index linked gilt ladder with what won’t fit, but this approach is “rather complex”. Alternatively cash them in and splash out on a new roof and a new car.
My parents used to have a good chunk of cash in ILCs, alas my holding is fairly puny so I’ll probably cash them in as I want flexible access to my cash. I suppose if you had invested in ILCs at regular intervals you could have an ILC ladder and not worry about the new fixed term restrictions.
I think it’s way more likely that government will stop allowing renewals of ILSCs at some point than that they start issuing them again. The only reason they’ve not stopped allowing renewals already is because they worry about the cost of the signal it would send about future inflation, relative to the benefits of killing off the dwindling stock of ILSCs.
Why? Because inflation and negative real interest rates is a nice option for government to have, in particular when public sector debt is at 100% of GDP. By issuing ILSCs they reduce the value of that option. Good luck to any Treasury official making the case for reissuing ILSCs in those circumstances!
Relatedly, are we still supposed to believe that the Bank of England is targeting 2% inflation? Consumers don’t seem to: “Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.4%, up from 3.2% in August 2024.”
https://www.bankofengland.co.uk/inflation-attitudes-survey/2024/november-2024
I have held lot of these for many years but I believe the benefits have eroded to the point that I am now cashing them in as they mature in favour of Index Linked Gilts with maturities that match my expected income needs over next 20 years. The simplicity and tax free status of ILSCs still appeals but their (very near) zero real return and not being able to touch them at all now until maturity puts me off. I do think the protection from deflation that ILSCs offer is not worth the loss of the real return that IL Gilts currently offer, even after tax.
And now I plan to spend the next 20 years trying to use the Monevator IL Gilt Calculator Spreadsheet working out exactly what my IL Gilts are worth……
My ILSCs will mature in June. My personal inflation rate is irrelevant to the renewal decision because nobody is offering me a product linked to that rate.
An inflation-pegged product is clearly valuable hence why they’re not making them anymore.
Previously I used ILSCs as my emergency fund so the new No Access condition has screwed that up. I need to decide whether to reinvest the ILSC money in index-linked gilts instead, or whether I can cover the emergency fund another way and keep the certificates as a longer term inflation hedge.
Linkers could slide back into negative yield territory over time, so that’s an issue.
Re: high food inflation / energy inflation. I now invest a small allocation in commodities as a hedge against this. It’s the very opposite of risk-free, however.
@CGT101 – very interesting thoughts. If the Treasury thought that inflation had a fair chance of undershooting the breakeven rate then offering more linkers would make sense. I’d also add that financial repression was working much better pre-Covid so – if that’s policy – then I think they’d try to get inflation under control as opposed to stoking fears that cause investors to demand higher real yields.
One wangle is that if you want to rollover a maturing ILSC you can split it between a 3-year and a 5-year cert. I only bought in the last year they were available, and in two slices, but by splitting them I now have a sort of “ILSC ladder” where a chunk matures more or less every year and I can rollover or cash in at that point. It’s possibly a bit pointless, because I will probably have them til I die. And as Al Cam says it might be better to go for 5 years in case they change the rules again – some of my holding went from RPI to CPI earlier than it would have done if I’d renewed the whole lot to 5-year certificate.
They aren’t the worst NS&I product that I’ve bought (take a bow, green bonds grabbed just before inflation and consumer interest rates went sky high – and then I was locked in for 3 years). I agree they are more likely to phase them out than create a new offering, are less appealing than they used to be – and I’m probably likely to keep holding them for now.
@AC
“If the Treasury thought that inflation had a fair chance of undershooting the breakeven rate then offering more linkers would make sense.” Well, they’re reducing their exposure to linkers. See if you can make sense of 2.20 to 2.24 in this!
https://assets.publishing.service.gov.uk/media/65e759a9ce8540001c12c412/Debt_Management_Report.pdf
I think it says:
– we’ve saved money by issuing linkers and they’ve been good for our credibility on inflation (among other things)
– but linkers expose us to inflation (say it ain’t so!)
– we don’t like the sound of that so, er, we’ll issue far fewer of them in future.
Doesn’t inspire much confidence in government’s faith in its own inflation targeting regime. It could be less that government “wants” higher inflation (has anybody estimated the costs/benefits of inflation at, say, 4% vs. 2% from a narrow UK government finance point of view?), more that they’ve just lost faith in their ability to control it. The world has changed a lot between 1997 and 2025.
I confess I don’t know how to find the breakeven rate for, say, the period 10-20 years hence, with ILGs switching to CPI (ahem) in 2030. Consumers seem to think long term consumer price inflation will be around 3.5%, I’m not sure what markets are saying.
Interested in what you say about weakening effectiveness of financial repression. Is this because of the gradual unwinding of QE?
I’ve found very little good commentary on this topic. The ongoing mismatch between the official inflation target and actual inflation outcomes and consumer expectations would seem to justify some.
@CGT101:
Unfortunately, I agree cancellation [of ILSC’s] is somewhat more likely than new issues.
Agree a lot has happened since 2017. And that the BoE (and US Fed, etc) has been very poor* at forecasting inflation. Furthermore, the levers traditionally used to control inflation seem to be ever less effective too.
A further thought is that in the UK as more DB pensions morph into insurer issued annuities** (so called BPA’s) the market demand for ILG’s may well reduce too.
RPI changes to CPIH (not CPI) in 2030. Curiously, CPIH is currently (Jan ’25) greater than RPI!
IIRC the inflation target is set by HMG?
Must admit I am rather unsure how all of this interacts with QE or [possibly more pertinently] its converse QT.
Personally, I would put little weight on consumer expectations. After all we all seem to want/demand ever growing benefits but with lower taxes.
* my own [inflation] prediction when I pulled the plug over eight years ago has thus far proven to be far more accurate and I have never up-issued it either. I did feel I was being a tad conservative at the time, but was largely guided by history as I never believed the hubris that inflation had been tamed.
** AIUI, insurers generally re-risk erstwhile DB holdings into commercial debt and other associated instruments
@Al Cam
Thanks for the correction on ILGs switching to CPIH (not CPI!) I’m sure there’s some reason the Bank of England targets CPI but ILGs will be based on CPIH….
Yes, the government sets the inflation target for the Bank of England and it has been 2% (+/- 1%) since 1997. In fairness, even with the recent inflation blip CPI has by my calculation averaged 2.5% per year since 1998.
Good point that the gradual winding down of private sector DB pensions will reduce demand for ILGs. The government gave this as its reason for reducing ILG issuance in this 2018 paper:
https://assets.publishing.service.gov.uk/media/5b4cded5ed915d43825f0e84/Managing_Fiscal_Risks_web.pdf
Government clearly decided that it can meet its financing requirement more cheaply (and at lower risk) by relying less on ILGs. I just can’t help remaining suspicious about why! High wage inflation combined with fiscal drag (keeping tax bands fixed in nominal terms) has been the gift that keeps on giving for government finances recently, though I don’t know how this weighs up against the higher debt interest cost from higher interest rates.
@CGT – Thanks (I think 😉 for sharing that report.
I think they’re saying the UK is exposed to too much inflation risk relative to our stock of debt:
“The proportion of index linked debt in the government’s wholesale debt portfolio is higher than across the G7 group of advanced economies and is around twice as large as the second highest G7 country. This is largely owing to the historical high level of structural demand for such instruments in the
UK, from the domestic pensions sector in particular.”
And it’s true. You can check UK share of a global gov bond fund vs a global linker fund and see us climb to 2nd spot in the linker fund.
So they’ve reduced the annual weight of debt issued as linkers over the last 6 years – although a couple of new ones have been released just recently.
As you say, they point out that issuing index-linked gilts has saved the country “£158 billion in 2023 terms” since 1981.
The analysis goes on to say:
“issuing at longer maturities is at least as attractive as issuing at shorter maturities”.
“The government places a high weight on minimising near-term
exposure to refinancing risk. This exposure is managed partly by
maintaining a sizeable proportion of long-dated debt in the portfolio,
which reduces the need to refinance debt frequently.”
“The government places importance on avoiding, when
practicable, large concentrations of redemptions in any one year. To
achieve this, the government will issue debt across a range of
maturities, smoothing the profile of gilt redemptions.”
“The government is mindful of the long-term inflation exposure in
the public finances and gives due consideration to ensuring inflation
risk is prudently managed. The government will manage this exposure
through its decisions on the appropriate balance between index-linked
and conventional gilts in its debt issuance in the coming years.”
“Issuing index-linked gilts has historically brought cost
advantages for the government due to strong demand from the
domestic pensions sector in particular, and market feedback suggests
that this is ongoing.”
Overall, it seems to be a balanced report in respect of inflation-linked debt – unless it’s written in a special Whitehallese I don’t understand.
It doesn’t seem mad to me to be wary of how much index-linked debt the country issues given that inflation is not fully under our control.
re: financial repression – It seems to me that the combination of Covid QE and the subsequent inflation shock plus ongoing economic weakness has caused investors to demand higher yields. Those yields are now above inflation. Financial repression requires debt-holders to take a real-terms loss. Millions of savers (and investors in linkers) were doing just that before 2022. It remains to be seen what happens next but it looks like yields will remain elevated for a while. To what extent the unwinding of QE feeds into that, I don’t know.
What does seem clear to me is that while the government is a major player in the market, it is not the only one. It doesn’t control it.
@CGT101:
I read relatively recently that getting UK ILG’s to market was a massive struggle and there were many powerful and influential opponents. Perhaps, these guys are now in the ascendency? That DB pensions became one of the biggest buyers of ILG’s in and of itself is IMO one of the greatest tragedies of the last twenty years. DB pension de-risking [with leverage] (often incorrectly mislabelled as LDI)* should have been called re-risking!
OOI, did you see my note to you [on an earlier comment of yours (about DC vs DB pensions) on a different @M post] about Henry Tappers blog?
Agree fiscal drag is insidious and will end up (if it is not already) invidious too.
* IMO this is really a case of regulatory capture by the insurers
Thanks for the update TA. It’s timely for me as I’ll soon need to decide whether to continue holding under the new rules.
That commitment to term is the only ‘con’ for me, but it’s a big one. As for ‘pros’ I do value the simplicity of the product and with the rumours of ISA changes maybe I’d regret giving up any other tax free wrappers.
If I can live with the term commitment I may earmark my tranches for spending in those potentially tricky years just before pensions are accessible.
@Al Cam (#59). Insurers writing Bulk Purchase Annuities (BPA) will still need assets with inflation exposure to hedge the inflation linked liabilities transferred from the DB schemes.
The regulatory framework penalises insurance firms that hold non-linked assets to back inflation linked liabilities.
What insurers may do is replace the inflation linked gilts (ILG)s that the pension schemes have with derivatives (inflation swaps) so they can invest in higher yielding fixed income assets.
But inflation swaps are normally issued by investment banks who probably aren’t in the business of taking outright bets that inflation remains low. So the banks will in turn want to hedge their exposure. The banks looking to hedge will either
a) need to find someone who wants to pay RPI increases to the bank to match the bank’s exposure to the insurer, or
b) hold an inflation linked asset themselves: in which case the best source of RPI is the ILGs.
So not clear cut that BPAs will necessarily lead to whole-sale rise in real gilt yields as long as there is :
i) demand for inflation linked assets from somewhere, and
ii) no other natural supply of inflation that can be used to hedge
@TA – yeah, it’s definitely fair enough for govt to be wary of the inflation exposure in its financing. But the skeptic in me wonders – what changed for it to want to reduce that exposure? Reduction in demand from DB pension schemes seems a good reason (if true).
On the other hand, I understand ILGs were issued in the first place to tackle the UK’s endemic inflation problem. Have we got that licked that now, with our ~30 year old inflation targeting regime? I’m not so sure based on recent experience…. Or has government’s ability to control inflation fallen since the early 80s, due to something or other, so the exposure is more risky? It would be good to know what the government thinks!
Fwiw, I don’t think government wants to let inflation rip (administrations tend to get booted out when that happens), but it might be happy for it to sit at 3-4% for a while rather than the 1-3% official inflation target.
On financial repression – I don’t really understand why lenders (including presumably DB pension funds that have inflation-linked obligations to meet) were willing a few years ago to lock in negative real rates and what flipped that. Why has financial repression become more difficult for government since 2022 (if it has)? I thought it was when it was most needed, like now, that financial repression was a tool government would turn to (as it did after WW2). Would love to read up on this.
Sorry if this all seems a little unpatriotic. I did my bit by buying INXG in the 2010s, admittedly more out of ignorance than patriotic fervour….
@Al Cam – more things I don’t understand! I did check out Henry Tapper, thank you for the suggestion. As I understand, he seems to think government will push the pensions industry to provide more guaranteed income options for DC pensioners vs. the current libertarian dream/nightmare. I’m interested to see how they square that with pushing pension funds to invest more in UK real assets and less in gilts.
@CHT101 (#58). It’s a bit laborious but you can work out what the market implied rate of CPIH is from 2030 when RPI reform is due to take place.
Comparing the yield on the conventional gilt with the real yield on a similar* inflation linked gilt gives the “break-even” average inflation rate implied by the market. Repeat this for several gilts in issue with different terms and you get the average rate of inflation the market is pricing in over those terms.
By comparing the successive average rates of inflation you can compute the “forward” rate of inflation implied over the period between the maturity dates of the successive gilts. And if you can pick gilts a year apart you can estimate the year- on-year increase in inflation implied by market pricing.
I’m sure the BOE regularly publish this, though a quick search didn’t immediately find it, the FT has done an article with it in – see red line in chart about half-way down entitled “Expected RPI annual inflation rate (%)”
https://www.ft.com/content/a2c3ee28-8d6a-43fe-9610-1e9c4dfd87de
*in practice this is easier said then done as the coupons and maturity dates rarely align precisely.
@Prospector – https://www.bankofengland.co.uk/statistics/yield-curves
Mathematically granny bonds are obviously poor value compared to linkers – CPI + 0.01% isn’t inviting versus RPI + about 0.5%. The deflation protection sounds good, but in practice in the UK it might as well be unicorn protection..
But maths isn’t everything! To me, granny bonds have two big things going for them. Firstly, they’re simple. Anyone you explain them too either understands them already or ‘gets it’ straightaway. Whereas there’s something about linkers, even with pretty savvy financial types, that reminds me of my mum and the offside rule: it just ain’t happening. Simplicity is underrated, especially if/when you might need backup.
Secondly, there’s the politics. Nigel Lawson made Gilts and Linkers capital gains tax free, at a time when doing so cost ‘those with the broadest shoulders’ a fortune (interest rates had spiked, so gilt prices were down, so everyone had huge capital losses on their bonds, which were at least useful against capital gains elsewhere).
What are the chances of Rachel Reeves pulling the same trick in reverse? It would be ‘brave’ given how short the country is of UK buyers of UK debt (relying instead on the ‘kindness of strangers’). But arguably less ‘brave’ than chasing the non-dom and Mayfair types off to Dubai etc (together with the huge amounts of tax they used to pay and wealth they used to spend)? So unlikely, but definitely possible? Whereas granny bonds, good old granny bonds, held by generations of politicians and civil servants? Would it be overly cynical to suggest that they’re probably safer from unexpected tax changes etc?
@Vroom – I think you’ve nailed it and identified the main benefit of ILCs (over ILGs), namely the infinitesimal risk of change of tax law regarding ILCs.
I think there is a low but not immaterial risk of the gain on low coupon ILGs being taxed as income in the future – either because of a legislative change or a court decision overruling Lomax v Dixon (and similar authorities).
ILSCs may be particularly useful for people ageing into “cognitive decline”, being virtually free of complications. Or for people who positively dislike money management. We expect to keep our own while laddering them via 3 year and 5 year terms.
But we also manage some money for family; there we expect to keep some and sell some. Probably we’ll buy linkers instead, or linkers + gold. I’d dearly like to be free of that responsibility but , you know – family.
@AlCam #44 “I’m keeping mine.”
You surprise me a little. It has taken a bit of effort to get my brain wrapped round index linked gilts, but they seem much better to me than ILNSC’s.
I have a lot of ILNSC’s, built up from back in the 1990’s and all I have ever done with them is just let them auto-renew. I can see myself just continuing to do that and end up with a holding of them when I shuffle off this mortal coil. (I think I would need to susbstantially up my spending to avoid that. Maybe just gifting it to charities is an alternative since I have no dependents, but I am still a little to cautious for that now, and would prefer to have a buffer and leave a bequest in my will if I have under-spent in retirement.)
Anyway, I am swapping my ILNSC’s for index linked gilts at maturity. I am just buying longer dated ones e.g. T41. That is paying RPI+1.8% currently until 2030, when as you say it swaps to CPIH + 1.8% until maturity in 2041.
As long as I hold them to maturity, as I expect I would happen by just auto renewing the certs, then over the next 15 years that should easily beat out CPI+0.01%.
Then there is the ability to sell them at any time, in case of emergency.
Finally the yield curve shape helps, you can in theory ‘surf the yield curve’. So for example, T41 has a clean price of 76.24 at the time of writing this post. TG36, which has the same nominal yield of 0.125%, has a clean price of 86.40.
That is an uplift of 13.3% (=86.4/76.24) (In real terms over the not quite 5 year period that is the difference in their maturity dates.) This does assume the shape of the yield curve remains the same, but I see very little risk here and would only sell them in a real emergency, instead expecting to hold them to maturity.
The biggest risk I can see is I may need to pay 20% tax on that 0.125% yield due to fiscal drag. 🙂
Would someone please explain why ILGs are quoted with their clean (not dirty) price? I’m sure this has been explained before but I’ve forgotten and would welcome a refresher. Thank you.
The counter-arguments for retaining ILSCs (index linked savings certificates) over buying index linked gilts (ILGs) are
a) if in the future real redemption yields on ILGs of equivalent term (e.g. 3 years) switched to negative again (measured against expected CPI rather than RPI to which they are actually indexed until 2030), then ILSCs offered at CPI + 0.01% might become attractive again in comparison. But as ILSCs are only currently available to those renewing old ILSCs then holding on to them now when returns aren’t good would be required to access any turnaround in the relative attractiveness of the offering.
b) as a side point to a) then future ILSCs might be offered again to existing holders in the future offering more than CPI + 0.01% (e.g. CPI + 2%)
c) if annual CPI is negative then ILSC don’t reduce in value, but the indexation on ILGs would be negative. Note that this floor applies on an annual basis rather than over the term of the ILSC so has some realistic potential value.
d) ILSCs are tax free. There is no capital gains tax on ILGs but the coupons are taxable if not held in an ISA or SIPP (albeit the coupons are typically quite small in relation to the capital gain)
e) ILSCs are easier to understand
f) If buying a 20 year ILG yield, you may find that 5 years later real yields may have increased reducing the price. Should you then need the money then, rather than in a further 15 years time as originally envisaged you will face a capital loss which you wouldn’t have faced through a 5 year ILSC. On the other hand you may have gained with an ILG if real yields fall, and you can sell ILGS at any time albeit subject to any capital loss.
g) there are costs in buying ILGs (bid/offer spread, buy costs, possibly platform holding costs) although these aren’t in most circumstances going to be significant.
If alongside your investments you have savings that will be needed in say 20 years to cover inflation linked expected expenditure deep into retirement, the obvious first comparison for protecting those savings over 20 years would be four linked 5 year periods of ILSCs which we might guess will be made available at say CPI + 0.01%pa. Or you could put that money into a 20 year ILG currently offering CPIH inflation plus 2.04%pa (RPI + 2.04% pre 2030). Even if we ignore the more desirable inflation indices that gilts offer (the expectation is RPI > CPI, CPIH > CPI although there is no certainty of this) that 2.04%pa difference mounts up over those 20 years. You would end up with around 50% more (=1.0204^20-1 = 1.50) using the ILG route if CPI is never negative, or if the inflation floor is balanced out by the potentially higher ILG inflation index.
Comparing a 5 year ILG with a 5 year ILSC doesn’t make the ILSC look good either.
You can bring in your own individual circumstances and own timescales, and considerations mentioned above into the equation, and other issues such as could the government conceivably default on index linked gilts but not on ILSCs. But if going the ILSC route (rather than ILGs) you then need to honestly ask yourself do those other considerations make up for that difference?
Over 20 years (2005 to 2024) my own savings in mainly easy access accounts, a few fixed rate accounts, a few notice accounts and some regular savers have achieved CPI + 0.7%pa. But over 10 years (2015 to 2024) my savings have earned CPI minus 0.8%pa. So ILSC have done well comparatively certainly over those 10 years and I sense that’s one reason why ILSCs have a feel good factor about them. But that isn’t a reason to hold them into the future when index linked gilts are the alternative choice.
@ Snowman. Good summary. But I’d definitely consider the ‘politics’ angle too.
@ JPGR. The easiest way to compare all bonds, including Gilts and Linkers, is their Yield (YTM). A real yield of 0.5% means the YTM is 0.5% + RPI (or CPIH from 2030), so you can compare that to the nominal yield of other bonds and make your choice.
The Clean Price of all bonds, including Gilts and Linkers, gives you this YTM (via a bit of standard maths, simplest with something like Excel’s Yield function).
The Dirty Price of an index-linked bond adds to the clean price the inflation that particular bond has accrued, which is a function of how old it is and how much inflation it’s had in its past. You need that to complete the full price of the bond (including all of its past accruals), but it’s not useful for comparing it to other bonds.
The similar situation with a granny bond would be when you get a renewal of a £15,000 investment saying it’s now worth say £29,123 and would you like to reinvest. £29,123/£15,000 =1.94 is the equivalent of the dirty price, it’s the total return since whenever you first bought it back in the day including all of the various ‘inflation + a bit’ you’ve earnt. Interesting, but of no use when the question is ‘should I reinvest at this point in time’. For that you need to look at the terms currently offered, CPI +0.01% in this case. That’s the equivalent of the clean price, which allows you to make your comparisons.
@Vroom – many thanks for your clear explanation.
@Prospector (#64):
I am no annuity expert. However, it is pretty clear that the insurers are far more sophisticated and able than [most/all] individual UK DB funds to use a mix of assets (inc. possibly ILG’s) to cover their liabilities, including inflation. One other thing that might be worth noting is that most private sector DB pensions have caps on their indexation and revaluation – thus in most cases the inflation exposure is bounded. Section 8 in Ned Cazalet’s 2014 paper When I’m Sixty-Four gives a flavour. Also, I am just not sure how influential UK legislation is to a lot of the BPA providers. See e.g. https://www.bankofengland.co.uk/speech/2022/september/charlotte-gerken-speech-bank-of-america
@CGT101:
Henry’s views are just that. AFAICT, he is very keen to see a return of DB-like pension schemes and IMO has a tendency to value anything that appears to be heading in that direction. Like a lot of blogs, I often find the comments to his posts very informative/interesting.
@Jam (#71):
As somebody else said, simplicity is greatly under-valued. I have also learned over the years that often the best time to buy/hold something is when nobody else seemingly wants it. Furthermore, it is not necessary IMO to squeeze every last drop out of everything! Lastly, and, possibly somewhat irrational/idiosyncratic [and as I have mentioned before @M] I have never liked/trusted bonds and pretty much eschew them in all forms.
Is this up to date about cashing in early? I have 3 bonds of various terms and the nsi website says in each case
Early withdrawal penalty
The equivalent of 90 days’ interest on the amount you cash in will be deducted from your payment.
And you won’t earn any index-linking on the whole Certificate for the investment year in which you cash in, even if you only cash in part of it.
@B. Lackdown – my guess is that you’re looking at bonds that renewed before 23 July 2023 and have yet to mature? You can still cash those in. But if you renew, you won’t be able to. (Thanks for mentioning this, I’ve updated the article). Here’s the relevant bit from NS&I:
https://www.nsandi.com/help/manage-your-savings/maturing-investments/index-linked-savings-certificates
Important changes to Index-linked Savings Certificates
No access during the term
Previously, we gave you access to your investment before the end of its term but charged a penalty equal to 90 days’ interest on any money you took out early plus you would lose a year’s index-linking on the whole Certificate. Now, once you’ve decided to renew a Certificate from 23 July 2023 onwards, you won’t have access to your money until the Certificate reaches the end of its new term.
You will however have the right to cancel within 30 days of renewing your Certificate.
Certificates starting their term on or after 23 July 2023
These Certificates cannot be cashed in before the end of your chosen term.
Nice work, Snowman!
If I had any I guess I’d keep them on the simplicity grounds and as backstop “emergency” fund if I depleted my near horizon liquidity in say a 3 year period (assuming they weren’t a huge % of my net worth). But I probably wouldn’t want to lock in for more than 3 years.
@HazeyJane – I think you’re on stronger ground than appears re: cashing in an inherited certificate.
On NS&I’s “Instructions to cash in Index-linked Savings Certificates” form it says:
You can cash in with no penalty:
if a single or last surviving investor dies
I don’t know that this amounts to a contractual obligation but it seems to be a clear declaration of intent to facilitate access to the money in this situation.
The form is available here:
https://www.nsandi.com/help/manage-your-savings/maturing-investments/index-linked-savings-certificates
@David C – thank you for sharing that nugget! Have updated the piece
@Jam
Interesting comment re ‘surfing the yield curve’. It’s something we haven’t discussed before in the index linked gilt threads
It’s probably best explained by a chart comparing on the brown line spot yields (which are the theoretical real yield on a zero coupon ILG of that term, which for the low coupon ILGs out there is roughly equivalent to the real yield on those ILGs because reinvestment is relatively unimportant) vs on the blue line the instantaneous real yield (which is the implied real yield at a single point in time).
https://ibb.co/XfLG5y2f
If you buy a 20 year ILG at 2% real yield then the implication is that you are buying something that has a real yield of less than 2% for the first 7.5 years and a real yield above 2% for the remaining 12.5 years, with these averaging out to 2% over the 20 years, 7.5 years being the point at which the blue curve heads above 2%.
How you interpret this depends on why you believe the yield curve curves upwards initially. If you think it’s a premium for taking the risk of investing over a longer period then you might assume all things being equal that the 20 year term ILG will in 10 years terms be repriced to a real yield for the remaining 10 years of about 1.3%, meaning that if you sell then the price will have gone up (relative to if it the real yield was still 2%) and you will have received a greater than 2% real return over the 10 years. However it’s not obvious to me that there should be a term premium for a 20 year ILG over a 10 year ILG (conventional gilts are a different matter because of the inflation risk). If you want to cover a 20 year inflation linked liability, then buying a 20 year ILG is the best matched option as buying a 10 year ILG and then with the maturity proceeds buying another 10 year ILG leaves you open to the risk of what yield will be available over the second 10 years. So it depends presumably on what the liability profile of those investing in ILGs is, as to what term premiums are priced in (?)
To digress if you want to invest to cover future inflation linked expenditure in say 20 years, why would you do this by 4 periods of say 5 year index linked savings certificates (or 4 consecutive 5 year ILGs), when the availability of real returns on the second, third and fourth ILSC is unknown because they may stop offering them for example? Why wouldn’t you choose a 20 year ILG instead?
Returning to my point as Jam says it depends on whether the shape of the yield curve is expected to change over time and as I struggle to understand the factors determining the real yield curve shape, it’s hard to give a view here.
I simply invest in ILGs for the term when I will need the money.
If (on a separate point to term premiums) ILGs did get repriced again to say negative 3% at some time in the next few years (I don’t remotely think they will) then it would be hard not to sell early and pocket the profit. After all if you would not remotely have conceived buying an ILG when the real yield was minus 3%, why would you hold onto an ILG where the real yield had moved back to minus 3%?
@Al Cam (#62), @CGT101 (#65)
‘‘The capital market is dead’: the difficult birth of index‐linked gilts in the UK’ tells the story of the introduction of ILGs.
My understanding is that the use of LDI arose because low gilt yields meant that many DB pensions were underfunded compared to their liabilities (IIRC, the one of which I am a member has gone from about 90% funding 4 or 5 years ago to well over 100% funding now). DB pensions were (post-GFC) forced to reduce their exposure to risk (hence their moving to gilts just as they became expensive).
@TA (#61)
According to the above paper, one of the reasons for the introduction of ILGs was to provide some assurance to markets that the UK government wouldn’t just inflate debt away (which had been an approach in the past).
One other ‘odd’ aspect of the UK’s debt that you touched on is the lengthy maturities issued (about 50 years compared to, IIRC, 40 for Japan and 30 for the US) – 50 years worth of inflation might be substantial. For issuers, shortening maturity when yields are high can be advantageous (the opposite of what investors would hope for).
I note in passing that the Canadians have recently stopped issuing inflation linked debt.
@Vroom (#68)
About 30% of UK debt is in the hands of foreigners (and this has been stable for more than a decade) who, presumably, are expecting a ‘reasonable’ return on their investment compared to the alternatives rather than any ‘kindness’.
ILG auctions over the last year have had bid-to-cover ratios of about 3.0 (anything less than 2.0 is considered worrying), so there is no current difficulty in selling them.
For retail investors, the taxation on ILGs currently compares well to that on US TIPS (as a search for ‘phantom income’ will show), but I suspect changing the current regime, i.e., to charge CGT on gilts, would be counterproductive. There doesn’t seem to be any evidence yet of the sort of ‘coupon management’ used in the 1980s (where gilts with low coupons compared to prevailing yields were issued in an effort to reduce periodic repayments).
@Alan S (#83):
The so-called de-risking of DB pension funds went on for around 20 years. The main cheer leader being the Pensions Regulator (TPR) – aided and abetted by the insurance industry. Moving to LDI if you are fully-funded and have a closed DB scheme may IMO be sensible. However, few schemes met these criteria, at which point financial innovation/engineering reared its head and leverage became involved. This is the critical point – as the loans required to load up on LDI were callable*. Yikes! And – surprise, surprise – the loans were called after the infamous Truss/Kwateng mini-budget. At which point [some] DB schemes scrambled to sell what they could to pay the collateral calls. The upshot is around £700bn (by some non TPR estimates) of DB assets** were wiped out for ever!! Sure, as the dust settled, gilt rates had increased, so the schemes [technical] liabilities also fell. The TPR’s spin on all of this is that this was a good thing as schemes are all now better funded (assets/liabilities). However, had schemes not got into leveraged LDI and kept their assets in equities (like they used to) they: a) should have grown significantly over the last two decades; and b) would not have had to get into a fire sale (post Truss/K’s brain fxrt) and sell whatever they could at knock down prices to pay the calls. That is, they would be in an even better funded status. So, sorry, but IMO the TPR are well out of order and the whole saga smacks of regulatory capture and spin!
*although it seems some schemes seemed to think their loans were just like a residential mortgage and as long as you kept up the regular [interest] payments everything would be tickety-boo
**the TPR official figure IIRC is lower or possibly still not even available, but you get the idea – a huge amount of DB assets were wiped out – just compare the figure I mention with Rachael Reeves £5bn benefits tweak this week
Still HODLing all my ILSC’s and no plans to cash in. Far too much (good) diversity in the product to give up.
And i can’t see the Government phasing them out anytime soon – how on earth would they raise the cash to pay everyone out? Last i heard Rachel was broke!
@Al Cam (#84) Insurers are relatively late to the DB-risking party. Of far greater influence is mark to market accounting. The International Accounting Standards Board (IASB) introduced International Accounting Standard (IAS) 19 in April 2001. IAS19 required companies with DB pension schemes to recognise the liabilities discounted at the yield on “high quality corporate bonds”.
The Financial Reporting Committee in the UK followed the IASB and introduced similar measures into UK Generally Accepted Accounting Principles.
As a Finance Director you now had a potentially large, volatile source of earnings and distributable profits to manage on your balance sheet. In some cases the DB pension scheme dwarfed the core business.
An army of pensions consultants and fund managers were more than happy to offer solutions to mitigate this volatility. Thus the LDI industry was born. It took just over 20 years for the chickens to come home to roost.
I think it’s easy with hindsight following one of the longest bull markets on record to say DB schemes should have remained invested in equities. But I can see why, without the benefit of foresight, if a) you force market to market discounting on firms, followed by b) the GFC causing huge deficits to be reported due to falls in the value of equities relative to corporate bonds, why short-termism prevailed.
@Alan S, @Prospector
You may find this post of some interest: https://henrytapper.com/2025/01/14/defined-benefit-pension-funding-iain-clacher-con-keating/
IIRC, this is the source of my hopefully OTT £700bn figure.
FWIW, I am absolutely not against LDI per se*, just the use of leverage with it. I have held this view for well over ten years now ie well before the wheels came off of the DB schemes approach. The DB calamity was IMO foreseeable and should have been foreseen**; especially if the main actors really were interested in DB risk reduction (rather than lining their own pockets via consultancy fees, etc re what was re-risking). IMO BPA is yet another form of re-risking – but that is whole other story, that is still to “come home to roost”.
P.S. @Prospector you are correct about marked to market, however IMO the insurance industry has been steering the TPR towards DB end games and insurance buyouts (at presumably a decent profit for the insurers) for years, possibly even prior to the 2004 pensions act that “legitimises” the insurance buy out approach.
*personally I follow floor & upside rather than (so-called) SWR which is essentially the same argument for a closed DB scheme
**and was foreseen and publicised by some who were, to put it politely, suppressed
I have been rolling over my fixed interest accounts to ILGs, but have so far left my ILSCs alone. I have been concerned that the government might change the tax status of gilts, and I have been waiting to see how the new government behaves. Pretty much the same as the previous government it seems. I probably do not have much to worry about. I certainly prefer the simplicity of getting rid of my ILSCs in favour of adding to my ILGs. My ILSC holdings are only about 9% of my cash/bond holdings, so it does not matter too much. I am inclined to get rid of the ILSCs when it is convenient to do so.