NS&I Index Linked Certificates – a government subsidy for rich savers

Get `em while they’re hot.  The new National Savings inflation linked certificates were launched on Thursday last week, to great rejoicing on the money pages of the newspapers.  And rightly so – these are a gimme.  Although the rate of interest (RPI + 0.5%) is lower than on the similar certificates withdrawn 10 months ago (RPI +1%), this is still attractive compared to the market rate for 5 year real yields.  With the same government credit risk, the 2016 index-linked gilt yields RPI minus 0.5%, i.e. a 1% lower yield than these retail only certificates.  AND the NS&I product is tax free!  So for taxpayers the yields are outstanding.  With the breakeven inflation rate on the 2016 linker at just 2.9% on an RPI basis, so maybe at 1.9% on a CPI basis, this implies inflation below the Bank of England target level on average over the next 5 years, the absolute level looks good too.

Why is the government offering such an attractive product?  It’s giving 50% taxpayers a AAA rated, riskless investment equivalent to nearly 10% at current levels of RPI and about 7% if inflation averages 3% over the period.  I can’t even find many junk bonds that pay 10% nowadays.  And this is happening whilst the banks and building societies are desperate for retail funding – this is “£2 billion that the private sector won’t be able to raise and lend to first time buyers and homeowners” (says the Building Societies Association).

Well I guess the first reason is that it needs the money.  The NS&I has to contribute £14 bn towards funding the deficit this financial year, and this will certainly help.  But did the rate need to be so generous, and so far from the market rate?  The government has talked about these certificates in terms of helping the poor savers stuck in low yielding bank accounts.  But those with savings to benefit from this deal are largely the richest portion of society – many of those will be higher rate taxpayers who have been given a windfall gain.  Is this a deliberate subsidy for the rich?

I’d also have thought that the government might have taken the opportunity to move to a CPI+ basis rather than continuing to use RPI.  After all, that’s the BoE’s target, and pension funds are being encouraged to move to using CPI for their liabilities too.  With the “wedge” between RPI and CPI high, and likely to be about 1% going forward that might have been a smart thing to have done – although there would have been some negative press headline risk in doing so. 

I talked to Richard Woolnough about this being a windfall giveaway for the rich – a kind of subsidy from the government.  He pointed out that these certificates have been available under the last Labour government too, and we doubted that a subsidy for the rich was their explicit policy.  But he also made a good point that there is another government subsidy for rich savers – the deposit protection scheme that allows a huge amount of savings to be guaranteed by HMG if you spread it around the market below the £85,000 ceiling for individual banks.  This, like the huge interest on the latest inflation certificates, is a real cost to the taxpayer – as the bailout of Northern Rock showed.  Another example of the baby boom generation writing itself generous promises for which the poor youth of today will end up funding?

Discuss Article

  1. Robin Hunter says:

    I thought the deposit protection scheme is provided in the first instance by a levy on the other banks,although I agree that if it is a ‘too big to fail’ retail bank (the clearing banks + Nationwide) the government would have to step in (again)

    Posted on: 16/05/11 | 10:40 am
  2. Stephen Brooks says:

    I seem to remember these certificates have a £15k maximum investment, so the benefit falls squarely in the middle class.  Those saving for a deposit on a house might find them useful.  Millionaires probably won’t be interested.

    Posted on: 16/05/11 | 3:54 pm
  3. Trevor Rothermere says:

    Over recent years, there were both 3 year and 5 year issues on offer simultaneously, allowing up to 30k to be squirrelled away each time. This time, they’ve halved that invest-able amount by only offering a 5 year issue, dropped the return to RPI+0.5% (it was RPI+2.75% in 1997!), and they’ve not index linked the maximum investment in line with inflation – with the MPC debasing the currency, 15k is not what it used to be.
    Hardly a fop to the rich, so the Veuve Clicquot elite won’t be much interested in them, but the Aldi Veuve Olivier drinking (and voting) mass may.

    Posted on: 17/05/11 | 10:03 am
  4. Jim Leaviss, M&G says:

    If you had invested the maximum amount in NS&I certificates over the past decade, and rolled them into inflation linked certificates when they matured, and invested on behalf of a spouse as well, you could quite easily be sheltering over a million quid from taxes, with a risk free return of nearly 10% for highest rate taxpayers.

    Obviously £15k on its own isn’t going to have anyone moving to Monaco to avoid income tax on the interest – but the cumulative impact of these tax free instruments is hugely beneficial for the well off – and given it’s expensive funding, to what benefit for the taxpayer or the banking system?

    Posted on: 17/05/11 | 12:43 pm
  5. Trevor Rothermere says:

    That’s all true, Jim, but how many people actually did what you’re suggesting: taking up every (or nearly every) offer, and keep rolling them on maturity?
    I suspect the numbers fitting that narrow criteria are very modest indeed, and the total funds held by such rare cases are not material in relation to the total held by everyone else, and the “costs” to the taxpayer are also not material in the grand scheme.
    Perhaps a cap on maximum holdings might allay your concerns? But some people may have used these as their retirement savings vehicle, diligently saving into them over many years, so any cap, for it to be equitable, would need to be very substantial, perhaps similar to the pension lifetime allowance of £1.5M. But there’s no cap on ISA holdings, so I personally don’t see that one is appropriate for index linked certs either.
    Perhaps, as a holder (although sadly far from the 7 figures alluded to!), I’m talking my own book, but I suppose we’re all guilty of that.

    Posted on: 17/05/11 | 4:52 pm
  6. Debbie says:

    Good grief!  Who cares about the theiving banks?

    Posted on: 19/05/11 | 9:00 am
  7. David Lawrenson says:

    Congrats on a very well thought out article and the only one I have read to say this is really a hand out to the better offs and especially to higher rate tax payers.
    I would be interested to know what % of people investing in it are high rate taxpayers and how this compares to other non ISA long term accounts. I’ll bet the % is a whole lot higher. Someone should ask the question

    Posted on: 20/05/11 | 2:10 pm

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