Technical Solutions

5th May, 2016

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NS&I Index-linked Savings Certificate – Renew or Cash in?

Does anyone have a NS&I Index-linked Savings Certificate that is due to mature soon?

It’s been a topic of conversation in a number of our client meetings recently, so we thought that it would be pertinent to help you decide whether to renew it, or cash it in.

When these certificates were launched back in 2011, with inflation rates at 4% and interest rates at the historic lows of 0.5%, they seemed an excellent idea for cash savings. Since then however, inflation has fallen and although clients have been reasonably happy with their returns, we’d like you to consider the pros and cons of renewing this time around.

So what’s to gain by renewing?

Top of the list is the secure nature of this savings plan. It is about as secure as they come, protecting against both inflation risk and default risk. The certificates are Government backed so the likelihood of them defaulting on their promise to pay back your capital and interest is pretty much non-existent. Being inflation linked also offers a cast iron guarantee of a real return. In other words, your money won’t fall in value in terms of its buying power.

Next would be the “tax-free” status they enjoy. Not only is the interest earned free from Income Tax but also Capital Gains Tax. This is naturally more appealing to those higher and additional rate tax payers considering their options. Of course the higher the return the more attractive the tax-free status becomes.

So what are the drawbacks?

The current rate of interest payable on the renewal is disappointing to say the least. NS&I is offering 0.01% above inflation. This means that you would have to stay invested for almost 100 years to get a return above inflation of 1%.

Accessibility is not great, although there is a choice of different investment terms. Once you have signed up, you can still access your money before the maturity date, but to do so will result in a penalty. This is equivalent to 90 days’ interest, plus loss of the index-linking (inflation return applied) on the full certificate for the entire year.

Finally, it is important to consider what is likely to happen to inflation over the coming years. If inflation rises significantly then renewing would seem a good option. The view of inflation in the UK from our Investment Committee is that it is likely to rise in the short term, before regressing again in 2017. Over the medium term we struggle to see any significant rise in inflation without an increase in Gross Domestic Product (GDP) and real wages (salary rises above inflation). Without the latter, we don’t feel there is much chance of an attractive return from renewing and in the case inflation does rise, investment markets should perform strongly, if you are able to take some form of investment risk.

So in summary, if you’re looking for an extremely safe place and aren’t worried about good returns or easy access to your capital, these can offer a good alternative to traditional cash deposits. If not, there may be better alternatives out there.

Disclaimer *Past performance is not a reliable indicator of future returns. The value of any investment can go up and down, and investors may get back less than they invested.*