Inflation fell again this week and tweeps are asking me if they should cash in their National Savings Index Linked Certificates before the return falls below that on normal savings accounts.
Easy peasy. No. Here’s why.
The latest issue of the NS&I certificates went on sale on 12 May 2011 and was pulled on 6 September. If you cash those in before the first anniversary you will only get back what you put in.
After that you get RPI inflation for the period you have held the certificates. It is measured from the index published the month before you bought them. So if you bought in May it begins with the March Index published in April, and the same when you cash them in. There is also a smidge more on top, 0.25% or less for the current issue.
Although inflation is on its way down it may not fall far and will probably rise again.
Last January VAT went up from 17.5% to 20% adding about three quarters of a percentage point to the rate of inflation, says the Office for National Statistics. From next month current prices will be compared with prices including the 20% VAT so that effect will disappear from the annual rate.
The tiny falls in gas and electricity prices this week – worth just two to three percent off the average dual fuel bill and less for many customers – will still leave energy higher than it was a year ago. Prices are expected to rise again under the pressures of environmental policy and global demand.
Finally, the Bank of England is continuing with its programme of creating new money through quantitative easing. Printing money has always and will always raise inflation – so far by an amount officially estimated by the ONS at 1.5 percentage points, though the upper limit to the prediction is.
The forecasts by the independent Office of Budget Responsibility (OBR) published before Christmas give holders of index-lined certificates some comfort. The OBR’s predictions for RPI are that it will stay well ahead of CPI (which it says will fall to its 2% target and stay there) then slowly drift up to 4% by the first few months of 2017. A return of 4% plus a smidge and tax-free is better for taxpayers than anything currently on the market.
Of course what you will get depends on inflation over the course of the years ahead when you cash in. Here is the table for RPI inflation quarter by quarter which was published alongside the OBR’s report on 29 November 2011
2012Q1
|
3.9%
|
2014Q1
|
2.9%
|
2016Q1
|
3.7%
| ||
2012Q2
|
3.4%
|
2014Q2
|
2.9%
|
2016Q2
|
3.8%
| ||
2012Q3
|
3.1%
|
2014Q3
|
3.1%
|
2016Q3
|
3.9%
| ||
2012Q4
|
2.8%
|
2014Q4
|
3.2%
|
2016Q4
|
3.9%
| ||
2013Q1
|
2.9%
|
2015Q1
|
3.4%
|
2017Q1
|
4.0%
| ||
2013Q2
|
3.0%
|
2015Q2
|
3.6%
| ||||
2013Q3
|
2.9%
|
2015Q3
|
3.6%
| ||||
2013Q4
|
3.0%
|
2015Q4
|
3.7%
|
For basic rate taxpayers those are still good returns and for higher rate taxpayers they are far better than anything on the market now. Even the nadir of 2.8% is equal to 3.7% taxed at basic rate and 4.67% at higher rate. If you are lucky enough to pay 50% additional rate tax it is equal to 5.6% taxable interest.
So holding your RPI-tracking-plus-a-smidge, tax-free certificates makes sense.
POST OFFICE NOT AS GOOD
And what about the latest offer from the Post Office? Its new inflation linked bond – issue 4 – pays annual RPI plus 0.25% a year over three years. Or you can choose a five year bond paying annual RPI plus 0.5%. But three things can make them much poorer value than the National Savings certificates. First, the interest is taxable – so they are best for non-taxpayers. Second, there are tough penalties for early encashment – so you have to be sure you will not need your money for three or five years. And third, for those with high savings, the account is only protected up to £85,000 if Bank of Ireland UK, which runs the bond, goes bust. National Savings they are not.
CORRECTION
In 'What a steel' 18 January, the AVA is the Automatic Vending Association not the Association of Vending Agents. Apologies
