Until it was withdrawn last year the National Savings and Investments Index-Linked Savings Certificates were popular with investors. The void that has been left by the withdrawal of this product has been filled by a bewildering array of imitators.
With the current bleak savings situation, with its low interest rates it is not surprising that investors are keen to find places t0 protect their money from the ravages of inflation. Most of these products are coming with a lot of small print however, so it is important to know what you aare getting yourself into.
The vast majority of the index-linked bonds available will lock your money in for five years. This is a big negative for several reasons. You might need the money at some point during that five years, and the hefty penalties for taking your money out could more and offset what you would be benefiting from. More importantly, the investment environment can change dramatically during half a decade.
This is the main sticking point with these kinds of bonds. The situation regarding interest rates is certain to change dramatically over the next five years. There is a broad consensus that both the British and European rates will be climbing sooner or later.
What will be returned by these kind of bonds depends on how inflati0n changes between when they are purchased and when they mature. The best time to get in on this kind of action was probably over a year go. It is always prudent to think long and hard before committing to investments, indexed-linked bonds are no exception to these.
Other than the issues already discussed another thing to watch out for is whether the bonds you are interested in are covered by the FSA compensation scheme should something go wrong. Most seem to be, but there may be some that do not – so fine tooth combs need to be applied to the details.
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You are right the imitators are “bewildering”. But that is their core business. To make profit from a commodity activity requires “confusion marketing” (see mobile phone contracts and recently regulator criticised consumer energy contracts).
The withdrawn NS & I certificates were tax free and withdrawal after one year had no penalty. The new offers are taxable and therefore will have a negative “REAL” return post tax if inflation remains high.
I’m unclear why you focus on lack of liquidity in the new products. If investors are young with net debt they should be paying down their mortgage or better offsetting with an offset arrangement. It’s tax free and therefore beats inflation.
If they are old with net cash, liquidity should not be a concern since their lives are less unpredictable in retirement. Better to purchase I-L government bonds through the government’s direct sales service for retail. The RPI uplift is tax free. Only the I-L coupon is taxable but real yields are less than 1% so the tax impact is minimal. Net/net the real return beats inflation post tax.
As to liquidity, these are marketable securities. They can be sold through the government’s retail service — no penalty but there could be a capital gain or with equal probability a loss (Therefore: “expected” gain or loss = 0).