Deep Singh

Does the ns and i three year index linked certificate still represent good value for higher rate taxpayers?
Three years seems like a long time what with irs on the increase.
At current inflation rates what is the actual return in % terms for a hrtp?

Thanks

RESSE

iTrader: (1)

National Statistics Online

RPI running @ 3.8% for July, was slightly higher in June (4.2% if I remember).

3 Year Index Linked Gilts - are these offered with extra interest of 1.35% compound over 3 years?

I think that works out at 2.25% gross for HRTP?

You can reinvest matured certificates with no £ limit (otherwise £15,000 per issue).

The Snug Rhino

i'll leave for others, i do almost no work with savings.

Deep Singh

On the website it says the tax free rate is index + 1.35% and the equivalent gross return for hrtp is index + 2.25%. So if the index is approx 4 then the return is 4+2.25 = 6.25% gross equivalent. If thats right then whats the point as AllLeic do an instant access account giving 6.3% and StdLife a 6 month bond giving 7%

fast bloke

RPI was 3.8 in July, giving 6.05, but if RPI jumped back to 4.5 (which it was in May IIRC) you would get 6.75. These certs don't always offer the best return, but they do offer good protection from inflation

Deep Singh

Thanks. 3 years seems too long for me for approx 6.75% when I can get 6.3% with instant access.

I thought it may have been 6ish% tax free which would have course made it very attractive

john banks

Well it was about 6% when RPI was higher, and it is tax free. Now it is more like 5%, but still worth it esp. for a higher rate tax payer with ISAs all used up etc. For a couple you can put in £60k in the present issues for both 3 & 5 year. The fixed rate stuff doesn't look good value at present to me.

Deep Singh

John I'm being thick here but:

Return is 3.8% + 1.35% = 5.15% tax free

The gross equivalent (I presume this is what I use to compare it to non tax free returns?) is 3.8% + 2.25 =6.05%. Why is this a good idea if I can get 6.3% instant access and 7% for a 6 month bond?

Thanks

john banks

Gross equiv 8.58%

I cannot find a better guaranteed return.

Petem95

Read the small print Deep - you can withdraw either the 3 or 5 year term ones after a minimum of 12months and there's no penalty and you receive all the interest

The way inflation (thanks mainly to food prices, oil prices etc) is going these look like they'll be worth hanging on to for a good while yet!

Deep Singh

Sorry but someone will have to help me with the maths

National Savings & Investments - Interest rates

The gross equivalent is stated as index (say 4%) + 2.25% for hrtp. How does that come to 8.58% gross equiv

I had read this circa 9% gross equiv before here, but to me the maths don't add up

john banks

The missing link is that the index of (say) 4% on the NS&I product is tax free.

If you are comparing a taxable product you need to return 4/0.6=6.67% gross just to stay with the index after tax.

Your "real" rate of return on NS&I is only 1.35%, but if you have your money in even the better savings accounts at higher rate tax you'll struggle even to keep with inflation.

One of the kicks in the teeth over recent years is that many savers are really losing money after tax and inflation. The spread between RPI and base rates has been within 1% only recently, which has been dismal for savers.

fast bloke

John, The gross equivalent is the rate you would have to achieve on a taxable product so you would need 6.67% before tax. The net equivalent would be 4% + 1.35% as that is what the product actually pays with no tax to pay/be subtracted

john banks

fast bloke, I don't agree with your calculation or at least my reading of what you've written.

6.67% before tax only covers the 4% (in this example) inflation.

Continuing to use 4% inflation and the 1.35% return, I need 8.92% gross from a taxable product to match my return.

Using the earlier exapmle of 3.8% inflation, I need 8.58% gross from a taxable product.

What is wrong with my working please?

john banks

Worked example:

1. £15000 in 6.67% savings account
Interest before tax: £1005
After tax: £603

2. £15000 in 4%+1.35% NS&I
Interest: £802.50

If I'm wrong on this I've catastrophically misinvested £60k and take back all I've thought about IFAs and will book in to see one

fast bloke

John - I think you might be allowing for tax twice in your calculations on the 15k, but when I sober up I will work your example to see if I am wrong. No chance before Monday thought. It is gonna be a painful weekend

john banks

I have included higher rate tax just once at 40% (hence the 0.6 divisor).

6.69% would be the gross equiv of 4%+1.35% for a basic rate tax payer, but we're talking higher rate throughout this thread.

When RPI is 4.8% the gross equiv of 4.8%+1.35% is 10.25% for higher rate!

The way NS&I express it can lead to the error that you can simply add RPI to the 2.25% as Deep did. However, you have to also gross up the tax free return of RPI as well to make a comparison with a taxable product. There are articles floating around the financial columns that agree with my calculations, some by financial advisors, some by newspaper hacks.

You need 6.33% gross for a higher rate tax payer just to match 3.8% RPI, which is why now that RPI has dropped the real return on the market leading instant access accounts is zero for a higher rate tax payer.

It seems unfair that you're taxed on inflationary returns in a normal taxable savings product.

Deep Singh

I'll be interested to see the outcome of this, though I suspect JB is right. I can't really see a Scot getting his maths wrong on money matters

JB, as you've read the small print is what Pete says correct? ie can you withdraw after 1 year with no penalties and take that years return?

john banks

I'm English

Yes you can withdraw after a year without penalty as such except that the interest rate is a little lower in the earlier years though.

I expect our 5 year ones may well get cashed in early to buy our next house, but perhaps not the 3 year ones.

I'm getting a little worried about our A&L account being over the compensation scheme limit with some of the rumours about them and B&B getting contaminated by some of the same problems as NR, but unless I hear any concrete news I'll leave it until 1st October before withdrawing down to the compensation scheme limit to avoid losing interest.

Deep Singh

I may well be accused of being hysterical but I would not have any money in any bank beyond the compensation limit

ps sorry, thought you were Scottish

The Snug Rhino

Your hysterical

If you hold a lot of cash (as some people do) the idea of limiting yourslef to 35k means you end up with loads of accounts to avoid something that wont happen....a UK bank going under with your cash.

john banks

If the FSA was as confident as you then why do they only pay out £31700?

There should be a risk premium (ie a higher interest rate) attached to accounts with balances over £35000 to reflect the risk IMHO.

I'm trying to work out right now what interest rate Northern Rock would have to give me to deposit £100000 with them... 10% would make me look at it, but little less.

How much more would I want from Alliance and Leicester to stop me withdrawing down to the compensation scheme limit? I don't know, maybe 7% at the moment?

Deep Singh

Its not even that good. The first £2k is paid at 100% and the next £33000 you ony get 90%. So when they say £31700 is insured its misleading, if you had £31700 in the account you would only get £28730.

The figure £31700 comes from what you would get back if you had £35k in the account.

So the FSA actually only FULLY gaurantees £2k!!!

john banks

RPI now 4.1, but CPI only 1.8. So at 5.45% return tax free we are getting a gain on a basket of goods per year of 3.65% in real terms. If only I believed CPI was related to my real life spending Maybe it is time to buy more gadgets