NS & I Index-Linked Savings Certificates back in vogue
APRIL 19TH, 2010 By ADAM
I am currently studying for my last few exams towards becoming a Chartered Financial Planner. This is the minimum standard for any adviser at Xentum and highlights the belief that our firm has in qualifications. The long hours of study will hopefully pay off but it has been tough, particularly when the sun is out!
One thing that has caught my attention during this study has been the in depth look that is required on all financial products, both old and new. One of the financial products that seem to have been lost in time is National Savings & Investments (NS & I) Index Linked Savings Certificates, an investment that has rather unfortunately fallen out of fashion in recent years. At Xentum, however, we think that they should be at the very forefront of investors’ minds for a number of reasons.
The first and probably most important reason is inflation protection. We talk to fund managers every week and one thing that remains consistent is the lack of certainty regarding inflation. Some commentators are talking up inflation, while others are stating that deflation is a serious risk. The election also brings more uncertainty to this topic. Our in house view is that inflation is a bigger threat, however why not pick an investment that protects you against both possibilities? Index Linked Certificates tick this box. They track the Retail Prices Index (RPI) and also offer a guaranteed 1% AER compound interest regardless of what RPI is.
The likelihood is that interest rates are due to stay low for the foreseeable future although inflation remains higher than analysts expected. The returns that you can receive from a deposit account are not much better than the Bank of England Base Rate of 0.5% unless you are prepared to put your capital at risk with a bank that we would probably not be comfortable with. The last two years or so has also taught us that your capital is not always secure in a deposit account.
In addition to inflation protection, the monies held within Index Linked Certificates are exempt from Income Tax and Capital Gains Tax so this is a great way of building up an inflation protected pot that the taxman cannot touch.
I guess the final issue here is that of security. An issue that has been thrust into the spotlight when many people learnt that money in a bank carries a risk. The underlying security for Index Linked Certificates is provided by the UK Government. The UK Government has never defaulted on its debt obligations.
As you can see, NS & I Index Linked Savings Certificates provides a pretty compelling investment story in the current economic climate for surplus cash holdings that are not likely to be needed for the mid to long term. Although you will not get the fixed rates and certainty of return that are offered by some cash ISA accounts, they probably provide more inflation protection than cash ISAs and you do not have to seek the best interest rate each year as your Index Linked Savings Certificates will increase in line with RPI plus the guaranteed rate (1% AER for current issue). Over the past year a 3 year issue would have provided you with returns equivalent to:
• 4.55% for a non tax payer
• 5.69% gross for a basic rate tax payer (20%)
• 7.58% gross for a higher rate tax payer (40%)
Even better, each person can put up to £15,000 in each issue of which there are two terms (3 and 5 years). Therefore a couple could place up to £60,000 in NS & I Index Linked Certificates at any one time, not bad for an investment that you can pick up at your local post office!
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