My retirement investing strategy asset allocation currently consists of 18% worth of National Savings and Investments (NS&I) Index Linked Savings Certificates. I have been buying these for quite a few years now and on average they are now providing me with an average headline return of 1.01% plus the Retail Prices Index. The big advantage they bring to me though as a 40% tax payer is that they are tax free.
I would like to buy more Certificates however you can only invest a maximum of £15,000 into each Issue which is currently Issue 19 for a 3 year and Issue 46 for a 5 year. These current issues are currently offering Index Linking plus 1% tax free which is pretty close to my average.
I think these are now really starting to provide me with some advantages and I would like to buy some more 3 years if they became available. Let me demonstrate with an example.
Let’s say that on the 22 January 2009 I purchased £15,000 worth of 3 year Index Linked Savings Certificates. Using the calculator on the National Savings and Investments (NS&I) website reveals that if I sold those certificates today they would be worth £15,279 which is a 1 year return of 1.9% tax free. However as a 40% higher rate tax payer the fact that they are tax free means that I would have had to earn a 1 year return of 3.1% in a taxed bank account for it to be equivalent.
If however I had bought on the 22 January 2008 then today they would be worth £15,985.50. Again, selling today would be a total tax free return for the 2 years of 6.6% or after factoring the tax free status a taxed bank account would have had to have provided a 2 year total return of 11%.
Finally, if I had bought on the 22 January 2007 then today they would be worth £16,830. Again, selling today would be a total return for the 3 years of 12.2% or after factoring the tax free status in a taxed bank account would have had to have provided a 3 year total return of 20.3%. That’s a Compound Annual Growth Rate (CAGR) of 3.9%. A taxed bank account for a 40% tax payer like me would have had to provide a CAGR of 6.4%.
I’m happy with that for “100% security for your money” as detailed on the NS&I home page.
Please note that this is a very simplistic example and there are a number of terms and conditions for these investments that I made myself aware of before I invested.
As always DYOR.
I, and all of us eventually, are faced with the problem of what on earth to do when these investments come to the end of their term.
ReplyDeleteUnfortunately, NS&I, while they do allow one to "roll over" these investments, change the interest rate. My latest tranche roll-over rate is at RPI + 0.01%.
Now I know that this is better than the negative rate that many people are buying into, but it still looks pretty awful. On the other hand, although UK inflation is low now, SURELY? it must run away eventually - perhaps its worth accepting the low real interest rate just to have some stability if/when inflation gets out of control (perhaps even after the next "roll-over" - we are looking long-term here)?
Should we "roll-over" these investments notwithstanding the low interest rate?
I am rolling over my ILSC. Although the current interest rate/RPI return is low, my holdings give me a relatively safe, straightforward, tax-free, lifetime (so long as I can roll them over) guard against inflation taking off. Having lived through quite a few periods of high inflation, tax-free "100% security" inflation protection was my first port of call before I started investing in a Stocks & Shares ISA. My only concern is that there are no new issues so I cannot add to my holding of ILSC.
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