Index Linking

[Cinzano Bianco]

Could someone check my understanding please:

Calculating index linking

17. An index-linked value will be calculated as V x B/A where:

(a) 'V' is the value of the Certificate at the beginning of the index-linked period (this will be the purchase price or the value at an anniversary date);

( 'A' is the RPI start level and is the index figure applicable to the calendar month in which the first day of the index-linked period falls (this day will be the purchase date or an anniversary of it); and

© ‘B’ is the RPI end level and is the index figure applicable to the calendar month in which the day after the final day of the index-linked period falls. This will be the maturity date, an anniversary date, or the day after the last completed month for which index-linking is earned.

In the event of this calculation producing a negative value, no index-linking will be applied.

So if i bought now with rpi at roughly 5%, and rpi is the same on an anniversary valuation, "index linking" would be a multiplier of 1, so i would only earn the interest over inflation on my investment? Doesn't seem like a very good investment if that is the case.

Mods, sorry this is on the main forum page, but i am hoping for a quick answer.

TIA.

[VeryMeanReversion]

Could someone check my understanding please:

So if i bought now with rpi at roughly 5%, and rpi is the same on an anniversary valuation, "index linking" would be a multiplier of 1, so i would only earn the interest over inflation on my investment? Doesn't seem like a very good investment if that is the case.

Mods, sorry this is on the main forum page, but i am hoping for a quick answer.

TIA.

RPI is an index, not a %. If the RPI index is the same next year (or lower) i.e no inflation then you get the 1% interest tax-free. The RPI index is currently increasing at ~5% pa. If the RPI index carries on at this rate for a year (likely IMO), you get 1%+5%=6% tax-free.

Too good to be true? I'm putting every penny I can into it at the moment, using Wife/Kids names and both issues. If more certificates come up, I will double up.

With BoE rates forced down and savings accounts paying a pittance, this looks like the only savings account worth having at the moment and it isnt subject to the 50K limit for deposit guarantees.

For HPC'rs, the addded advantage is that this money does not get geared up for mortgage lending.

VMR.

[Selling up]

Could someone check my understanding please:

So if i bought now with rpi at roughly 5%, and rpi is the same on an anniversary valuation, "index linking" would be a multiplier of 1, so i would only earn the interest over inflation on my investment? Doesn't seem like a very good investment if that is the case.

The bonds are specifically designed to give a return of 1% over inflation, guaranteed. So yes, if RPI inflation over the next 12m is 5%, the bonds pay 6%.

As to 'not a very good investment', I beg to disagree. Where else do you plan to find 1% over inflation (eg 6% in the last 12m) guaranteed?

[Cinzano Bianco]

The bonds are specifically designed to give a return of 1% over inflation, guaranteed. So yes, if RPI inflation over the next 12m is 5%, the bonds pay 6%.

As to 'not a very good investment', I beg to disagree. Where else do you plan to find 1% over inflation (eg 6% in the last 12m) guaranteed?

You missed the end of the sentence, where I said "if this is the case". I agree with you, but my understanding was flawed as pointed out very clearly by VMR (thanks btw!).

[Cinzano Bianco]

RPI is an index, not a %. If the RPI index is the same next year (or lower) i.e no inflation then you get the 1% interest tax-free. The RPI index is currently increasing at ~5% pa. If the RPI index carries on at this rate for a year (likely IMO), you get 1%+5%=6% tax-free.

Too good to be true? I'm putting every penny I can into it at the moment, using Wife/Kids names and both issues. If more certificates come up, I will double up.

With BoE rates forced down and savings accounts paying a pittance, this looks like the only savings account worth having at the moment and it isnt subject to the 50K limit for deposit guarantees.

For HPC'rs, the addded advantage is that this money does not get geared up for mortgage lending.

VMR.

Thanks VMR. I guess the "I" in RPI should have given that away . I am going to be putting all spare cash in these.

Will the VAT increase next year affect RPI (I should do a bit of research really!)?

[Oliver Sutton]

RPI is an index, not a %. If the RPI index is the same next year (or lower) i.e no inflation then you get the 1% interest tax-free. The RPI index is currently increasing at ~5% pa. If the RPI index carries on at this rate for a year (likely IMO), you get 1%+5%=6% tax-free.

Too good to be true? I'm putting every penny I can into it at the moment, using Wife/Kids names and both issues. If more certificates come up, I will double up.

With BoE rates forced down and savings accounts paying a pittance, this looks like the only savings account worth having at the moment and it isnt subject to the 50K limit for deposit guarantees.

For HPC'rs, the addded advantage is that this money does not get geared up for mortgage lending.

VMR.

Thanks for that.

Didn't realise you could buy max out on two lots at the same time. Just bought the 3yr issue as well.

It's tax-free as well (not that I live in the UK anymore).

[VeryMeanReversion]

Will the VAT increase next year affect RPI?

Yes, it will. However, all basket items are not VAT rated so it won't in itself cause a full 2.5% extra on RPI.

Edited June 24, 2010 by VeryMeanReversion

[VeryMeanReversion]

Just adding a pretty picture

[MinceBalls]

This is an incredibly common myth, it seems that a lot of people (as it KEEPS coming up) think that they get the difference between the opening RPI and the closing RPI (ie: if the latter is less than the former then you only get the +1% back),

Maybe if more people understaood the mechanism more people would invest in these?

[MinceBalls]

Something else of use: IF you withdraw your funds AFTER year one but BEFORE the time of maturity you still get the Index Linking portion. You lose 1% but currently this is a small % of the overall gain.

[VeryMeanReversion]

Something else of use: IF you withdraw your funds AFTER year one but BEFORE the time of maturity you still get the Index Linking portion. You lose 1% but currently this is a small % of the overall gain.

You don't even lose the 1% bit, just get a bit less (e.g. 0.85%) depending on how many complete years you have.

[MinceBalls]

You don't even lose the 1% bit, just get a bit less (e.g. 0.85%) depending on how many complete years you have.

Even better

[happyhaddock]

You don't even lose the 1% bit, just get a bit less (e.g. 0.85%) depending on how many complete years you have.

To clarify, you receive one twelth of the applicable year's inetrest per complete month held along with any positive increase in the RPI during the period since the anniversary date.

From nsandi.com:

11. The amount due when cashing in a Certificate which has been held for at least one complete month from an anniversary date will be the anniversary value on that anniversary date plus:

(a) any positive index-linking for each complete month from that anniversary date to the date of repayment; and

( 1/12th of the annual interest for each complete month held from that anniversary date.

In the event of a decrease in the RPI, negative index-linking will not be applied - you will receive the value of the Certificate at the previous anniversary plus interest as detailed above. This paragraph does not apply to any month not completed before the maturity date.

[guitarman001]

This is an incredibly common myth, it seems that a lot of people (as it KEEPS coming up) think that they get the difference between the opening RPI and the closing RPI (ie: if the latter is less than the former then you only get the +1% back),

Maybe if more people understaood the mechanism more people would invest in these?

I thought it was the difference! SO what is it? Please!

[Guest absolutezero]

You don't even lose the 1% bit, just get a bit less (e.g. 0.85%) depending on how many complete years you have.

Aye. The 1 percent is over 3 years. Not 1 percent per year.

[Frank Hovis]

Aye. The 1 percent is over 3 years. Not 1 percent per year.

No, 1% a year.

For three year:

Yr 1 0.85%

Yr 2 0.95% of end yr 1 value

Yr 3 1.21% of end yr 2 value

http://www.nsandi.com/products/ilsc/rates

[ccc]

It is all explained on their detailed page on the NS and I website.

I think HPC could do with an NS and I forum

[Guest absolutezero]

No, 1% a year.

For three year:

Yr 1 0.85%

Yr 2 0.95% of end yr 1 value

Yr 3 1.21% of end yr 2 value

http://www.nsandi.com/products/ilsc/rates

I stand corrected.

Not a bad deal at all then all considered!

[Frank Hovis]

I stand corrected.

Not a bad deal at all then all considered!

Yes, a very good investment for now. Timing the jump out and into something else in a couple of years or so is the tricky bit though.

[petrodollar]

Yes, a very good investment for now. Timing the jump out and into something else in a couple of years or so is the tricky bit though.

I have a feeling that things are not quite right.....and that "something else" in a couple of years is not going to happen.

The consequences of the past couple of years have not yet played out, just starting that end game now my question is not if inflation rips for it will, but how many countries will end up in default.

The recent grunts by the USA of europe breaking ranks regards stopping printing money to stimulate, and facing cuts to balance the books should worry everone.

[Prof]

I`ve just cashed in my 3 year certificate, due to expire next Jan 1st. The reason is that it`s showing a decent increase in value at the moment (about 9% since I invested 2.5 years ago). I`m thinking that RPI will fall a little between now and early 2011, so if I hung on, the value of my certificate would fall back a bit. I`m going to reinvest in a couple of months, hoping to benefit from the VAT increase.

[shindigger]

Ive whacked £30k in the 3 and 5 year. I dont care about the rate, i just want to know that Lloyds et al arent rebuildng their balance sheet at my expense.

It really is time for cash savers to grow a pair.

Plus its guaranteed and its tax free.

Bring on the next issue.

[guitarman001]

Good post, shindigger!!

I put £11k into index-linked certificates (well, should be going in soon). Still have £7k in a Lloyds Vantage account - but taking it out of that poor ISA and 'sticking it to the man' felt good.

Took some money out of my S&S ISA also - market is very strange right now, not keen on losing that money.

Just need to figure out what to do with excess cash now!

[fleabag]

I've been meaning to open one of these bad boys for a while but taking ages to save £15k!

Can you open one with say £7k and then add more moneys to the account as and when you earn it?

I`m going to reinvest in a couple of months, hoping to benefit from the VAT increase.

Why do you consider waiting a few months better than investing now?

Ta

[ccc]

Yes you can open with a small amount - I think 500- and add to it. Some of us spread the purchases out over several months to get the benefit of differing RPI indexing. Check the other threads on this forum for details of this.

Yep best plan IMO. No point really trying to pick a good time to buy. The year following will probably turn out with a poor return.