Bank Savings Alternative???
Posted in Daily £££ Chatter |
Index-linked certificates are looking surprisingly attractive.
National Savings & Investments has largely disappeared from the savings league tables since its brief flirtation with market-leading growth bond rates last October (you may remember – I know that many Wealthflow clients benefited from these excellent rates). On the face of it, index-linked certificates offering 1% pa over inflation for three or five years fall into the also-ran category. However, closer examination reveals that this may not be the case.
The structure of the certificates is such that if they are held for at least 12 months, the return will be RPI inflation plus:
| Year | 3 Year Issue | 5 Year Issue | ||
| During Year | Cumulative | During Year | Cumulative | |
| 1 | RPI+ 0.85% | RPI + 0.85% | RPI+ 0.75% | RPI + 0.75% |
| 2 | RPI+ 0.95% | RPI + 1.81% | RPI+ 0.85% | RPI+ 1.61% |
| 3 | RPI+ 1.21% | RPI + 3.04% | RPI+ 0.90% | RPI+ 2.52% |
| 4 | RPI+ 1.15% | RPI+ 3.70% | ||
| 5 | RPI+ 1.36% | RPI+ 5.11% | ||
At present the best one year fixed deposit rates are around 3.0% gross. For a basic rate taxpayer that means if the RPI increase for the year is more than 1.55% (three year certificate) or 1.65% (five year certificate), the certificates offer a better return. For a higher rate taxpayer the corresponding figures are just 0.95% and 1.05%.
The chances of inflation reaching these break-even levels in the next year are quite good:
- Any increase in VAT or other indirect taxes in the forthcoming Budget will work through to inflation.
- Any rise in mortgage interest rates – realistically they cannot go lower – will also work through.
- The Bank of England’s latest projections for annual CPI inflation (generally a lower figure than RPI) is around 1.5% by the middle of next year, with a 30% probability it will be above 2%. The Bank has consistently under-estimated inflation in recent times.
The same type of break-even calculations can be made over longer terms, but the outlook for inflation then becomes more uncertain. In any case index-linked certificates look anomalously good in comparison with index-linked gilts, which offer less than 0.3% pa above inflation for terms of five years and negative real returns for three years duration.
WEALTHFLOW COMMENT
For anyone looking for what could be a short term home for cash, index-linked certificates are worth considering, even if they are not held for their full term.
