A journalist recently asked me to answer the following question from one of his readers: “My NS&I 5 Year index linked certificates worth £15,000 are about to mature next month and I need to know whether I should cash them or renew for another 5 or 3 year term, given that inflation is so low?'
I had to do it in 200 words and nearly managed it. Here is my reply:
The three primary attractions of index linked certificates are that firstly returns are tax-free, secondly the interest rate is guaranteed to beat inflation and finally of course they are as safe as the Bank of England. That said, with the Retail Price Index running at 1% and the certificates offering only an additional 0.05% on top, in truth they are only just shading inflation. In the overall scheme of things 1.05% is frankly not very exciting.
Tax-free alternatives include a five-year fixed rate cash ISA paying 2.5% with the State Bank of India or 2.1% for three years. Your will reader will be well aware that the NS&I certificates are only available for customers with maturing certificates. They are not on general sale and indeed have been incredibly popular when they have been on sale. Should inflation take off in the upcoming years, this index linking protection could be valuable. So walking away from them should not be a decision taken lightly.
Investors should ask themselves, “am I happy to take some risk with my investment?”. If the answer is “yes” then an asset-backed investment such as a stocks and shares ISA or OEIC certainly provides an opportunity for significantly better returns which indeed historically they have delivered over the long term. As ever, a balance and a mix is often right.
Your reader needs to make a decision based upon these factors.
14 July 2015
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