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Weekend reading: Grab those index-linked certificates

Weekend reading

Thoughts from around the Web.

Run, don’t walk, to put some money into the new five-year index-linked certificates from National Savings & Investments.

NS&I is a wing of the UK government, and money you invest with it is 100% capital protected.

You may remember that NS&I’s index-linked certificates were withdrawn due to excess demand last year. Commercial banks have rushed to fill the gap with inflation-proofed bonds, but these are less attractive and based in some cases on derivatives. The Post Office also launched a bond, but it could not be held in an ISA, making the income taxable.

The new 5-year certificates from NS&I offer annual tax-free gains of RPI + 0.5%.

As the FT notes:

If RPI inflation remained at its March level of 5.3 per cent, the certificates would pay 5.8 per cent interest tax free. To achieve that return from a conventional, taxed savings account, a basic-rate taxpayer would need to earn a gross rate of 7.25 per cent, a higher-rate taxpayer would need to earn 9.67 per cent, and a 50 per cent taxpayer would need to earn 11.60 per cent.

It’s good news that NS& have continued to link to RPI, as I wrote when we first got wind these certificates would return.

The 0.5% rate above inflation is fair in these low interest rate times, though less than the old rate.

Of course, there’s every chance that inflation could fall and interest payable on ordinary savings accounts rise over the next five-years, which could make these certificates uncompetitive. But that is not the point.

Their value as part of your portfolio is diversification on unbeatable terms. No other inflation hedge can give you a guaranteed real return above inflation with zero risk to your capital. They’re a rare break for private investors, too. Banks and other institutions have to buy index-linked gilts, the price of which fluctuates, unlike the capital value of these certificates.

You can even withdraw your money early if the certificates get too uncompetitive, albeit with a reduction in the payment of interest due for the first year.

In short, even limited to £15,000 maximum investment per person, the limited issuance is likely to be snapped up very soon. Blogger Simple Living in Suffolk is beside himself with joy:

All in all, pretty awesome, a safe home for your cash. You aren’t going to get rich on it, but your cash is worth as much at the end of the five year term as it was at the beginning, there’ll just be more of it. I kind of like that in cash.

As I say, I see the certificates as a diversification play as much as about return. I am a chap who loves cash in a portfolio, anyway, but these certificates go an extra mile in usefulness.

Their appeal is an interesting sign of the times. It’s hard to remember the days when you could routinely get a real return (i.e. above inflation) from a savings account of 3% or so, yet that was the case for an account-hopping saver just a few years back.

Those days will return, and it may then be hard to remember why we got so excited about these new certificates.

But in the current climate (where I’m still pretty bullish about shares, incidentally) they are a must have.

From the money blogs

More on money and  investing

  • The people versus Goldman Sachs – Rolling Stone
  • Banks: Chained but untamed – The Economist
  • Another digital gold rush – buy or sell? – The Economist
  • All-time high for US exports [graphic]Business Insider
  • The Bank of Canada on commodity price cycles [bit old]Bank of Canada
  • Jeremy Grantham says the latest boom is rational… – GMO [Great PDF]
  • …but Bill Miller says its just a cyclical bull market that will burst – FT
  • London buy-to-let ‘gold’ [scroll down for interactive map]FT
  • More converts to holding cash in a portfolio, albeit permabears – FT
  • The day in the life of a private wealth manager – Telegraph
  • Can you beat the average return? Telegraph
  • Double-dip predicted for housing market – Independent
  • Downsizing from £60K a year to £16K in West Wales – The Guardian
  • An old playboy writes his À la recherche du temps perduTelegraph

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{ 18 comments… add one }
  • 1 Moneyman May 14, 2011, 11:25 am

    Thanks for the always informative weekend reading list.

    On the NS&I thing, maybe I am going against the flow, but I’ve just jumped the other way – a fixed 5-year 5.05% bond as described here:

  • 2 The Investor May 14, 2011, 11:56 am

    @Moneyman – I just tried to post to your blog, but the comment hasn’t shown up. Anyway, nothing wrong with having a bit of fixed interest security in your portfolio, too. I don’t see it as either/or with the NS&I certs, you can have both and hedge your bets.

    (p.s. The odd relevant direct link in comments is fine, but please not every time as I don’t want to encourage too much spamming – thanks).

  • 3 Phil May 14, 2011, 12:15 pm

    All my savings are tied up in ISAs (a mix of cash at 2.5% and tracker funds) – these bonds look good but not sure if it’s worth moving cash out of the ISAs in to these? I plan to fully utilise my ISA allowance the next few years so won’t have any room to put the return back in to an ISA at the end of five years. Any thoughts?

  • 4 RetirementInvestingToday May 14, 2011, 12:57 pm

    Hi TI

    I’m also a big fan of NS&I ILSC’s and have been buying them for a few years now allowing me to build my holdings to a point where 17% of my Retirement Investing Today portfolio is held in them. I hold them as part of the “safe” portion of my portfolio instead of cash as for a 40% taxpayer they beat any bank account hands down.

    Unfortunately as you say it’s only RPI+0.5% this time around however with RPI at 5.3% and the possibility to bail out any time you like (although no interest if done in the first year) they could have gone for RPI+0% and probably still had a lot of interest.

    The main negative for me is that I’ve always preferred the 3 year issues as they get to maximum AER faster and you never know when you might need to rebalance your portfolio (cash them if the stock market falls a long way), generate a house deposit (if the UK market ever returns to somewhere near normal) or to generate some emergency cash (as I’ve just experienced and why ermine is buying them).


  • 5 Salis Grano May 14, 2011, 1:37 pm

    Yes, I agree on the attractions and I hope that the supply will be maintained (as NS&I allege) for a bit so that I have time to organise myself.

    I think, though, they might tell an interesting story for the next election period with inflation plummeting and real returns on savings to please Tory voters.

  • 6 Richard Beddard May 14, 2011, 2:55 pm

    I’ve been trying to call the NS&I helpline for days (not about index linked savings) and its always busy! Can this really have caused so much excitement?!

  • 7 Alex May 14, 2011, 3:54 pm

    I don’t know how much attention I or anyone else should pay to what ‘star’ fund manager Bill Miller says about anything. Perhaps that’s unfair: he did teach me a very valuable investing lesson – that of individual active manager risk. The significant long-term underperformance of his Legg Mason US Equity Fund was very instructive. Oh, I learnt something else from that fund: to ignore all active fund recommendations from ‘expert’ IFAs/commentators.

  • 8 ermine May 14, 2011, 6:51 pm

    It’s hard to remember the days when you could routinely get a real return (i.e. above inflation) from a savings account of 3% or so, yet that was the case for an account-hopping saver just a few years back.

    Ah, but it wasn’t real, though, was it? Icesave, Landesbanki, Northern Rock… It’s not the job of cash to make a real return. If it seems to be, then there is something fishy going on IMO.

  • 9 Richard Beddard May 15, 2011, 12:19 pm

    Just an update. I finally got through to NS&I after hours of trying and after they’d dealt with my query, I asked if it was normally so difficult to contact the contact centre. She said they’d had to take on extra people to deal with all the queries about the new savings certificate and even so they are incredibly busy. So there you go. Inadvertently trampled by the herd.

  • 10 RetirementInvestingToday May 15, 2011, 2:09 pm

    Hi Richard

    What would the contrarian investor be doing now? Certainly not following the herd I’m guessing.

    That said I’m going to be buying the new ILSC issue as I can’t find anything better out there for this part of my portfolio. Transfer of money from savings account to current account in progress in readiness for buying early next week.


  • 11 The Investor May 15, 2011, 3:25 pm

    @RIT – Quite right – I agree about the herd, and for that reason remain about 85% invested in equities, REITs, and some esoterica like subscription shares and preference shares.

    Buying these certs isn’t about making an active play for return, as I see it, it’s about getting a truly excellent asset class into your portfolio (guaranteed real capital upside, zero downside) for the diversification.

    @Richard – Thanks for sharing. I’m not at all surprised at the rush for these certificates, as RIT alludes above, most people don’t want anything to do with risk after the past few years and the savvy higher rate taxpayers among them have been on tenterhooks. I think they could be sold out in a month or two.

    @ermine – Good point, and the real return on cash was indeed higher than it ‘should’ have been for a few years, but you can expect at least 1% real over the past century. And that’s not even assuming you get the best return on cash – in reality, in contrast to chasing funds, it’s very easy for a private investor to chase the best returns with typical cash savings (up to low six figures say), provided you commit to moving your money around every year or so.

    @Alex – I don’t think these guys are the idiots that perhaps you do, as I’ve said before. a lot of their problems are the fees, that destroy whatever edge they can deliver year on year. Miller is on record as saying his 15 year outperformance was at least partly down to calendar effects. In my opinion the best reason for sticking with passive funds (among many) is that it’s very hard to identify market beaters after fees in advance, not that they don’t exist.

    @Salis – You old cynic. 😉

    @Phil – Tricky. If your cash is in ISAs and you’ve got other inflation influenced investments in your portfolio (e.g. equities and REITs) then personally I wouldn’t close down ISAs to get these certificates. Chasing the best cash ISA rates for five years is probably going to do you about as well, assuming inflation subsides to the more normal 3% – the downside is you’re not getting the guaranteed real return if the Bank of England throws in the towel. But most of us are only getting it on a portion of far larger portfolios, due to the certs limited size, so we’re all in that boat. (Hence my point about equities/REITs).

    The certs only run for five years – an ISA allocation is for life! I’d be loathe to lose it. Your call though, I’m just chap on the Internet. 😉

  • 12 Faustus May 15, 2011, 4:33 pm

    So long as Mervyn ‘inflation, what inflation?’ King is running the show at the BoE, which is likely for a couple more years yet, it is a pretty sound bet that interest rates will stay very low. They are relaxed about high inflation which i) helps to massage away debt, ii) combined with low interest rates keeps the housing market on life support, and iii) keeps the pound weak for export growth. Sod most ordinary British savers in other words.

    My query would be whether it is worth waiting to see whether the 3-year version of the certificates will be on sale shortly? The 3-year ones offer a bit more flexibility.

  • 13 RetirementInvestingToday May 15, 2011, 4:42 pm

    Hi TI

    Your strategy of still holding 85% in equities is certainly more risk tolerant than my Retirement strategy. I’m currently sitting on 54% equities plus 10% property funds/ETF’s.


  • 14 RetirementInvestingToday May 15, 2011, 4:49 pm

    Hi Faustus

    My preference is also for the 3 years.

    Over on my blog I have attempted to build a dataset which shows the 3 year NS&I ILSC issues since Issue 1 (2003) and the 5 year NS&I ILSC issues since Issue 6 (1992). Firstly 3 Year ILSC’s didn’t start until June 2003 so they are the exception to the rule rather than the rule. Since then there has been only 1 time when they did not run a 3 Year in parallel to a 5 Year. In this instance it appears that you had to wait until the next 5 year issue for a new 3 year. Hope that helps.


  • 15 Faustus May 15, 2011, 5:08 pm

    Thanks RIT – really good to see you back in action as your blog has always been a goldmine of useful figures and resources.

    It is interesting that the longest period between issues of the 3 year certs is 400 days, which we must now be about to break. But as you illustrate issues have always been made concurrently with 5 year certs, so sadly it looks as if there’ll be no new releases now for several months at least.

  • 16 Alex May 15, 2011, 5:10 pm

    Hi TI,

    1. I don’t dispute the existence of “market-beaters” – where there is underperformance of a given index, there must be outperformance, too. The problem, of course, is: does that outperformance persist over the long-term? Almost certainly not (for several reasons).

    2. Miller’s significant long-term underperformance of the S&P 500 was not simply due to costs – if only it was. His stock selection went seriously awry, as I’m sure you know.

    3. Oh, I don’t think “these guys” are “idiots” – they’re very clever at marketing!

  • 17 The Investor May 15, 2011, 6:06 pm

    @Alex – Ha, laughed out loud at point 3. 😉 Yes, I recall Miller’s value filter went a bit haywire re: the bank stocks.

  • 18 Moneyman May 16, 2011, 10:30 am

    Good discussion!

    Just a thought – if you don’t pay tax on your savings (I don’t), surely the BM inflation-linked account is better?


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