Index-Linked Savings Certificates
by George Hatjoullis
So what was the highest risk free return one could have earned on a sterling asset last year? Most people would point to a long maturity gilt-edged bond. Gilt yields have fallen substantially year to date and this provides a nice risk-free, and tax-free, capital gain, as well as a taxable, risk-free, coupon, Except that gilts are not totally risk-free. They are free of credit risk but, by definition, not free of interest rate risk. What if yields had risen?
The answer is of course Index-linked Savings Certificates. These have returned a minimum* of 3.23%, which is the rise in the RPI index year to date. This is free of credit and interest rate risk. It is also tax-free. If you managed to do better than this then do tell. The interesting thing is that the minimum is also a positive real return, which is odd for the index component. The reason is the RPI is now discredited as an inflation index but, as you can see, not disused. The official inflation index is CPI which rose by 2.3% over the same period. So the index component of your ILSC earned a real, risk-free, tax-free, return of almost 1%. Nice!
The RPI typically comes in above the CPI so this situation is unlikely to change any time soon. So where do you get your hands on these certificates? You cannot. They have been discontinued but those holding when they were discontinued have been allowed to renew at each anniversary. The interest rate above RPI has come down to 0.05% but the fact that they are index-linked, and in particular index-linked to the RPI, makes them invaluable. If you have some keep renewing. You cannot do better for this risk class. In fact this is the only product in this risk class.
The question that remains to be asked (there is always a point to my blogs) is why do the government allow renewal at maturity? They are gifting an arbitrary group of savers with the opportunity to accrue at a rate not available elsewhere on any comparable instrument. Indeed the next best return is not even close. The next best product offered by NS&I for new savers is the Investment Guaranteed Growth Bond which offers a taxable 2.2% for a fixed term of three years. Unfortunately, the maximum investment per person is £3000 which is considerably less than the ILSC. There appear to be no private IL savings accounts available to new customers and rates on private sector 3 year fixed savings accounts are below 2% at the time of writing. It is an anomaly for which the lucky few can be grateful but it is an odd situation.
- The amount over RPI paid depends on when you renewed. The last renewal was at 0.05% over RPI.