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D<\/span>o you have any NS&I Index-linked Savings Certificates? Are they approaching maturity? Are you wondering what to do with them?<\/p>\n The product\u2019s attractions have deteriorated in recent years, so renewing your certificates may not be the no-brainer it once was.<\/p>\n On the other hand, inflation is back and proving stickier than a toddler wielding jammy doughnuts. And if that\u2019s a concern for you then there are still good reasons to keep even today\u2019s atrophied Index-Linked Saving Certificates in your portfolio.<\/p>\n Let\u2019s recap the main features of Index-Linked Certificates. We\u2019ll consider the pros and cons of renewal after that.<\/p>\n National Savings and Investments\u2019 Index-Linked Saving Certificates are a unique fixed-term savings product.<\/p>\n The important features are:<\/p>\n Protection against inflation<\/strong> \u2013 Index-linked Savings Certificates safeguard your savings from inflation<\/a>. The amount you have in them grows in line with the UK\u2019s Consumer Prices Index (CPI), maintaining your purchasing power as prices rise.<\/p>\n Deflationary floor<\/strong> \u2013 Unlike index-linked gilts<\/a>, your certificate\u2019s value will not shrink if the index declines during the term. Instead, your savings\u2019 nominal value remains unchanged if deflation occurs. In fact it will actually grow in real-terms and you\u2019ll still receive interest on top.<\/p>\n Tax-free<\/strong> \u2013 Both the inflation-linked returns and the fixed interest are exempt from UK income tax and capital gains tax. Certificates\u2019 tax-free status means they don\u2019t take up room in your ISA or SIPP<\/a> nor eat into your personal tax allowances. You don\u2019t need to declare them or do any tedious paperwork.<\/p>\n Government guaranteed<\/strong> \u2013 National Savings and Investments<\/a> is the UK government savings bank. Consequently, Index-linked Saving Certificates are as safe as investing gets because they\u2019re 100% backed by HM Treasury.<\/p>\n You cannot lose money<\/strong> \u2013 Index-linked Savings Certificates are not potentially subject to capital losses, unlike bonds. In this sense they act like other cash savings products.<\/p>\n Fixed terms<\/strong> \u2013 Your money is locked up in Index-linked Saving Certificates for fixed terms of two years, three years, or five years. (Two-year terms are only available if you roll over an existing two-year certificate.)<\/p>\n Fixed interest rate<\/strong> \u2013 Currently you get 0.01% on top of the index-linked inflation adjustment. This is a fixed rate that is guaranteed not to change during your term.<\/p>\n No longer available<\/strong> \u2013 You can only renew existing Index-linked Saving Certificates when they mature. The Government hasn\u2019t made new issues available since 2011! It shows no sign of changing course. This means Certificates can\u2019t be replaced if you cash them in.<\/p>\n With Index-linked Saving Certificates your savings are adjusted each year \u2013 on the anniversary of your investment \u2013 in line with movements in the CPI index.<\/p>\n The fixed interest is then calculated on your inflation-adjusted savings (not the original amount).<\/p>\n In this way both capital and interest keep pace with inflation<\/strong>.<\/p>\n Index-linking is applied annually, and is reinvested into your Certificate to compound over the term.<\/p>\n There\u2019s no annual payout: you receive your initial savings + index-linking + fixed interest at maturity.<\/p>\n Here\u2019s a quick example of how index-linking works:<\/p>\n CPI index = 100<\/strong> (Index figure two months before the start of your certificate\u2019s investment year.)<\/p>\n CPI index = 105<\/strong> (Index figure two months before the end of your certificate\u2019s investment year.)<\/p>\n 105 \u2013 100 \/ 100 = 0.05 (5% rise in CPI inflation over the last 12-months.)<\/p>\n The formula for the percentage increase is:<\/p>\n New index figure minus old index figure \/ old index figure * 100.<\/p>\n Your savings grow by the index-linked amount:<\/p>\n \u00a31,000 * 1.05 = \u00a31,050<\/p>\n Plus 0.01% fixed interest:<\/p>\n \u00a31,050 * 1.0001 = 0.105 (10p)<\/p>\n Total = \u00a31,050.10<\/p>\n As you can see, the interest rate is now derisory. But the index-linking makes a considerable difference when inflation is high.<\/p>\n No early access<\/strong> \u2013 You\u2019re now completely locked in to your Index-linked Saving Certificate for the entire fixed period if its term began on or after 23 July 2023. If your Certificate\u2019s term started before 23 July 2023 then you can cash in the product early \u2013 in exchange for the loss of 90 days\u2019 interest and that investment year\u2019s worth of index-linking.<\/p>\n If your old-style Certificate allows early access then do it as close as you can to your \u201canniversary date.\u201d At that point your index-linking is added and a new investment year starts. Thus if you cash in a month after your investment year begins, you\u2019ll only lose a month of uplift. Cash in one month before your anniversary date, and you\u2019ll lose 11 months of index linkage.\u00a0<\/p>\n Index-linked to CPI not RPI<\/strong> \u2013 The inflationary uplift used to be linked to the Retail Prices Index (RPI), not CPI. RPI inflation is typically higher than CPI, but this older measure is gradually being phased out in government and across a range of financial products.<\/p>\n Terrible interest rate<\/strong> \u2013 The interest rate has progressively worsened and is pretty much irrelevant today. But that doesn\u2019t mean you should necessarily ditch your saving certificates, as we\u2019ll see.<\/p>\n It\u2019s pretty straightforward:<\/p>\n You can also withdraw some of your money while reinvesting the rest.<\/p>\n Splitting your reinvestment money between different terms is also an option. The minimum reinvestment amount is \u00a3100 per Certificate.<\/p>\n What you cannot do, sadly, is invest any new money.<\/p>\n Index-linked Saving Certificates offer a 0.01% fixed interest rate, regardless of which term you choose.<\/p>\n That\u2019s a pitiful return. But it\u2019s better to think of it as a:<\/p>\n Tax-free, inflation-matching rate + 0.01%<\/strong><\/p>\n To contextualise how good that can be, remember that CPI 12-month inflation was 10.5% in December 2022.<\/p>\n You couldn\u2019t get that from any bank account. Indeed you couldn\u2019t get it from equities either. They posted a loss that year.<\/p>\n Inflation has subsided since 2022 but it hasn\u2019t gone away. Inflation can also flare up shockingly fast \u2013 despite lying dormant for decades \u2013 as the post-Covid inflationary surge taught us.<\/p>\n A good investment should hit as many of these bases as possible:<\/p>\n When measured against these criteria, Index-linked Saving Certificates are a fantastic investment.<\/p>\n They do provide a real return, though at 0.01% a year they only just break even against inflation.<\/p>\n Indeed, other major asset classes<\/a> have historically offered better returns than 0.01% over the long run.<\/p>\n But the crucial difference is that the Index-linked Saving Certificates\u2019 real return is guaranteed<\/strong>. Cash locked up in Index-linked Saving Certs will match inflation every year<\/strong>.<\/p>\n In contrast money market funds<\/a> posted a real-terms loss nearly every year from 2009 to 2023 (inclusive, with the only exception being a tiny win in 2015).<\/p>\n Most bank accounts failed to keep up with inflation during that period, too.<\/p>\n Meanwhile, equities, bonds<\/a>, gold<\/a> and every other asset class you care to mention are volatile. They can be struck by bear markets<\/a> that last for years on end.<\/p>\n Whereas from the perspective of a diversified portfolio<\/a>, Index-linked Certificates are completely unaffected by and uncorrelated with whatever is rocking other assets\u2019 world \u2013 for good or ill.<\/p>\n Straightforwardly, the truly invaluable role that Index-linked Certificates play in your portfolio is as an inflation hedge<\/a>.<\/p>\n Very few assets properly hedge inflation. And the best alternative \u2013 index-linked gilts<\/a> \u2013 is much more complicated.<\/p>\n High inflation is a deadly foe and NS&I Index-linked Saving Certificates counters it on unbeatable terms. No other inflation hedge can give you a guaranteed real return with no capital downside along the way.<\/p>\n Of course, there\u2019s every chance that inflation could fall away and interest payable on ordinary savings accounts offer a greater return over the next five years.<\/p>\n But that is not the point<\/strong>.<\/p>\n The idea with insurance is to take it out before you need it. And these Index-linked Certificates neutralise inflation \u2013 as well as deflation \u2013 like no other asset.<\/p>\n Nobody knows what inflation will do in the years ahead, which is why central banks frequently misjudge the risk. Yet here we have a super-safe inflation-defeating device that will preserve your spending power.<\/p>\n All for no fee!<\/p>\n Add in the completely tax-free returns and also their simplicity, and it\u2019s easy to see why existing Certificate holders are loath to give them up.<\/p>\nHow do NS&I Index-linked Saving Certificates work?<\/h2>\n
NS&I index-linking explained<\/h3>\n
How have NS&I Index-linked Saving Certificates features deteriorated in recent years?<\/h3>\n
What are my choices when an Index-linked Saving Certificate matures?<\/h3>\n
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NS&I Index-linked Saving Certificates interest rates<\/h3>\n
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Are NS&I Index-linked Saving Certificates a good investment?<\/h2>\n
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Inflated expectations<\/h4>\n
Final verdict: should I renew my Index-linked Savings Certificates?<\/h2>\n