30 Mar 2015, 9:31am
personal finance
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19 comments

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  • Rust never sleeps – 20% inflation in five years

    In March 2010 I wanted to gift my future self a regular income, and came up with a great way of doing it. Every month I would buy a three-year NS&I inflation-linked savings certificate of £500, in three year’s time I would have a three-year steady income of £500 a month. Ideally that would have been more, but I was saving in pension AVCs and  filling ISAs at the same time.

    I only managed to do that twice before NS&I ILSCs disappeared like summer rain – when they briefly reappeared I hit ’em straight between the eyes with the full £15k. The low-maintenance high-security non-taxable inflation-proofing of NS&I is too valuable to waste. These NS&I savings I consider strategic reserves against the unexpected. Because the value isn’t destroyed by inflation these savings are an in emergency break glass sort of thing to the extent that I will borrow money for short-term requirements rather than break into this, because once they’re gone there’s nothing else available that will preserve liquid cash across the years without stupendous amounts of faff. I don’t expect much of cash, I’d just like to find the same amount of value when I come back for it rather than have it melt into the ground.

    Rust never sleeps, they say, but it came as a surprise to me to receive this statement, on a rolled over echo of that first £500

    photoshopped to ice the details

    photoshopped to ice the personal details

    In only five years 20% of the value of that cash has quietly died in the night; it now takes £600 to represent the same value that £500 did in 2010. (Update – Bruce correctly pointed out I missed that ILSCs offered 1% over inflation for the first three years!) It summarises everything that’s wrong with cash – a great medium of exchange but a dreadful store of value. NS&I ILSCs fix the store of value problem, but since debasing the currency is how promises are paid for they aren’t sold any more.

     

    30 Mar 2015, 10:45am
    by Grumpy Old Paul

    reply

    Back in the 1980’s, I used to get RPI + 4% and the withdrawal rules were much less onerous!

    Now, I’m wondering whether, in the event of a major stock market crash, to cash in my NSI index linkers and invest in 5-6 income-oriented investment trusts at a hefty discount. I’d certainly give it serious consideration if the S&P 500 came down by 30% or so. I’m not sure that I have the cojones for it though!

    I bought a NS&I 3 year certificate on 13 April 2010. It’s return was “RPI pluse 1.00% pa compound if held for 3 years”. When rolled over the new return became “Index-linking + 0.15%”.

    You’ve ignored the extra percentage so inflation hasn’t been quite as bad as you’ve said.

    Scary stuff, especially considering we’re living in times of low inflation!

    @GOP Here’s to that crash! I could use it too, as a net buyer for a while.

    @Bruce – oops – my bad! Thanks – I forgot that. The Bank of England inflation calculator which probably does CPI says £500 in 2010 was £572 in 2014

    @UTMT – that period did span some pretty serious inflation 2010-12

    RPI + 4%, wow!

    I managed to fill my boots for 3 or 4 years (I think) before these beauties were pulled and my collection are now worth about £97k. I think the best I ever got was RPI + 1.25 %, or maybe 1.5%, but even that now looks good given that they are rolling over to be 0.05%.

    Each time another one matures I think maybe I should pull out as I can get better elsewhere but then I think, no, the current level of 0.5% to 1% for RPI surely won’t go on for much more than another year, if that.

    I might consider pulling out and investing if stockmarkets drop 30% but I’m also not sure if I have the balls. If I did I’d probably look at all my other sources of cash (far too heavy in cash and kicking myself for not investing more heavily a few years back) before touching these though as the thought of having a chunk of cash that holds its value no matter what is comforting. I well remember a year or two of inflation around 25% in the late 70s which served me well as I had no savings and a new mortgage. Having experienced that once there’s always the fear it could happen again but this time it would be really bad news with almost no mortgage and a big chunk of savings and investments.

    Bottom line is that I will probably hang on to these, if they let me, until everything else has gone or I pop my clogs and leave it all to the kids.

    @Sean nicely played! I still kick myself for not pitching for more in that last window.

    The big plus of these is the low maintenance – sure you can do better elsewhere but you’ll be spinning accounts for the next few years – these are just set and forget. Absolutely perfect for an emergency fund!

    I have a separate stash of cash for the markets, and I need that drop too, although I can be chilled about holding cash because inflation is low. Maybe Mr Varoufakis could oblige?

    There is a wider lesson here

    Government quietly takes away tax free index linked NS&I certificates in 2011 and slashes interest rates on roll-overs

    In 2014 and 2015 government launches inferior “pensioner bonds” and “help to buy ISAs” in “savers budgets” in 2014 and 2015

    “In March 2010 I wanted to gift my future self a regular income, and came up with a great way of doing it. Every month I would buy a three-year NS&I inflation-linked savings certificate of £500, in three year’s time I would have a three-year steady income of £500 a month.”

    I may be missing something, but can you please walk me through this maths? 🙂

    @Monevator The scene – a working Ermine with too much money and knowing he’s got three years to go, and a three-year intercession after that before it would be reasonable to draw my pension. And very fearful of inflation – it was high at the time and it looked like the world was ending (2009)

    After hitting AVCs, loading my ISA I was still fearfull it would all fall. Every month I planned to buy a three year duration £500 NS&I cert, which would safeguard me against high inflation for three years, and in three years the ladder would come out and give me a guaranteed £500 in 2009 pounds income. For three years, all coming out of the pipeline once a month from April 2012 till about now.

    They iced NS&I ILSCs soon after I hatched that plan. So I have £500, £500 and £14k cert, ‘cos The best laid schemes o’ mice an’ men / Gang aft agley 😉

    I now consider this as the bedrock of the Ermine emergency fund, because it should stay invariant in real value. I don’t demand a return on cash, but it hacks me off to have it seep into the ground while my back is turned.

    Ah, got you, thanks! 🙂 You mean an inflation proofed return *of* capital beginning after three years.

    I couldn’t believe you meant you believed somehow you’d make a £500 a month return *on* capital after three years from everything I know about you and your ability to do maths — but then I’ve seen retirement do funny things to people’s brains… 😉

    Have a good weekend! I’m working today, and wish I wasn’t. So score this one to you in our ongoing earnings fatwa or not debate. 😉

    @Monevator- I’m a simple man when it comes to cash as you know. I don’t expect it to get bigger in value, but I do take the hump when it gets less.

    Commiserations on the working Good Friday – mind you it looks like it’s be no fun to get anywhere and the sun isn’t shining 🙂

    I am sad that the ILSCs are no longer available, but I guess if they were I might not buy them because the new rates are so low compared to what they used to offer in the past. We managed to nab about £13k’s worth in 2011 with part of this as a rollover from a previous year’s cert.

    I think if I were to do it again, I’d probably use an index-linked gilt tracker fund like Vanguard’s instead.

    Cheers

    @M Interesting angle, but this index-linked gilt tracker isn’t really the same sort of thing as cash. Let’s face it, you wouldn’t be sore to see a cash deposit up 25% since three years ago. Particularly as at a rough guess cash RPI is ~10% cumulative since 2012. Until you ask yourself the question “under what circumstances would this be down 25% on cash”
    and the answer is probably in market turmoil, when you would want the trusty sword of cash to hold true and be liquid. For an emergency fund liquidity and non-volatility trump return on investment; emergencies tend to be more likely in times when liquidity dries up.

    There again the average Fi individual probably doesn’t need more than about 15k for an emergency fund – risks greater than that that you can’t afford are a candidate for insurance rather than an emergency fund.

    24 Apr 2015, 3:27pm
    by Loyal Follower

    reply

    Hello Ermine. I hope you’re well it’s been almost a month since your last post. I hope it is just a break and that you are well.

    I think a lot of us are hoping the same. It would be really good to hear from you soon. 🙂

    26 Apr 2015, 9:25am
    by Accrington Mike

    reply

    Plus one.

    28 Apr 2015, 11:13am
    by SpreadsheetMan

    reply

    Blinkin’ retired people, too chilled out and relaxed to keep up the posting schedule 🙂

    > Blinkin’ retired people, too chilled out and relaxed

    I know, the lazy so-and-sos 😉 The Ermine is back in town now, thanks for the love, guys!

    28 Apr 2015, 11:06pm
    by Loyal Follower

    reply

    Welcome back!

     

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