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Tuesday, 5 July 2022

Nice Little Earner

Fixed-term Indexed-linked Savings Certificates, once nicknamed “Granny Bonds”. 9.0% interest this year. Not bad! And it’s tax-tree.

They are no longer on sale. National Savings and Investments withdrew them in 2011. However, if you already owned some, you have been allowed to renew them for another period at the end of their fixed term. These are now two years into their fourth five-year term. They started off at £10,000 in 2005 and were last renewed in 2020.

They used to be linked to the Retail Price Index (RPI) but NS&I switched then to the poorer Consumer Price Index (CPI) in 2019. Even so, interest of 9% (8.99 + 0.01) is good. I doubt I’ve ever had as much as that before on anything. But we have endured years of low interest because inflation has been low. More than once I’ve considered cashing them in.

To calculate the average compound interest over 17 years the formula is (no doubt Mr. Brague will correct me if wrong):

    £10,000 x interest17 = £15,287 
    therefore, interest = 17 √ 1.5287  (the seventeenth root of 1.5287) = 1.02528
    In other words around 2.528%

Which I guess is probably about what you would have received over that period in a Building Society account.

It’s swings and roundabouts. High inflation was inevitable. It affects everything. So perhaps we should not be trying to take seats off swings and rides off roundabouts. It puts things out of balance and makes us dissatisfied.

23 comments:

  1. When I was undergoing my stockbroking training in the 1980s I was advised by an old timer in the trade to always include some National Savings products in a balanced portfolio. This was a rare thing to hear in the stockbroking world and more often than not scoffed at by young and old brokers alike. I always put them in my recommendations and many of my clients had fixed rate bonds, Pensioner Bonds and even Premium Bonds. They represented a bit of safety for the nervous investors.

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    1. This is our emergency disaster fund, an essential thing to have somewhere safe. Fortunately, we haven't needed it so far.

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  2. I was with you until you started rooting. I am and ostrich person. I am not game to look at the balance of what gives me an income. Maybe I am headed to poverty.

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    1. As Rachel says above, these are as safe as can be. I

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    2. Andrew; with the amount of interest earned that you recently posted about, I doubt very much that you are heading towards poverty.

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  3. Replies
    1. This year, yes, but as said, it only makes up for poor interest in earlier years. It will be good if it continues, but I'm not convinced it will.

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  4. You're not gloating, are you Tasker?

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    1. Hope it makes clear I'm not gloating - it just balances things out that's all.

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  5. Nothing is making 9% interest these days, so yeah, that's pretty good!

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    1. As said, I don't think I've ever had so much, even when interest was high around 2000.

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  6. They are very good but like most fixed term bonds they are not inflation proof but then nothing but work and the ability to do it and invoice for it is. Quoting for work is a pain at the moment. My approach is to charge for materials up front and the job at an agreed rate. Fuel at the contract mean plus 5%.
    Property seems good but it only gives profit to fools. We all have to live somewhere is one point and the second one is that it's impossible to own property without the state telling you what you can do with it or when they can take it away. So not really ownership at all.

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    1. I agree you're right in the sense that CPI etc do not reflect true inflation, but yes, if you have self-employed work then that almost by definition is inflation-proof. As regards property, you may have seen my comments elsewhere that I think the whole country are fools. I can't see where it will end.

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  7. Back when Jimmy Carter was president and inflation was rampant and interest ran at 20%, my mother bought Certificates of Deposit at about 20% interest. She bought the longest term available, and had several $20,0000 certificates. Of course the market crashed, interest fell to low single digits, but for several years she continued to collect very high interest on her CD's. She was so pleased.

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    1. Smart move. I once had a building society account on which they guaranteed that the interest rate would never fall below 6% (Newcastle Building Society). After rates had generally been below that for a couple of years, they found a way to pay it off. So much for guarantees and promises.

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  8. I never have to worry about interest rates on investments. I simply don't have any investments, was never able to afford any. My brother has a few and is always pleased when he gets a bit of profit on them, but doesn't worry about the lean years.

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    1. Never thought of it as an investment, more of an emergency fund. It hasn't really kept pace with inflation because in 2005 it would have about bought medium-sized new car. It wouldn't now.

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  9. My attitude to money is learnt from bitter experience when family quarrelled over it. So at this end period of my life, I do not own property but both my children are mortgage free and I am happy.

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    1. There's a lot to be said for that. I can imagine it causing awful problems if those with money don't specify what is to happen to it. And then, even if they do, you hear of awful cases such as re-marriages where the new spouse's family gets everything and the original money owner's family gets left out, which seems very unfair.

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  10. Sometimes we accident into some jam to go with the bread. We've made nothing on savings for years so 9% would be very welcome.

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    1. It is. As said, I almost cashed them in, but then realised that inflation would bounce back so hung on. I didn't imagine 9% though.

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  11. Mr. Brague, being the Anonymous mentioned above, has read Mr. Dunham's post and wishes to state that he is not now nor has he ever been a maths whiz and know nothing about 17th roots. He does remember the quadratic equation (minus B plus or minus the square root of B squared minus 4AC over 2A) and can calculate square roots. He was once able to calculate cube roots but that ability left him long ago.. However, Mr. Brague can do simple math so set about to do the reverse of what Mr. Dunham stated but multiplying 10,000 by 1.02528 and then that product by 1.02528 and so on 17 times until reaching the same figure Mr. Dunham stated, 15,287 -- HOWEVER, Mr. Brague would like to point out that he does know the difference between simple interest and compound interest, and this is not compound interest, it is merely simple annual interest extended over 17 years. If the original 10,000 pounds had been compounded quarterly or monthly or daily, as the manner of some banks nowadays is, the 17th year's total would have been much greater.

    Mr. Brague was quite exhausted after this mental effort and has been eturned to his padded cell.

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    1. Thank you for your thoughts and apologies for subjecting you to such mental effort. Isn't it annual compound interest because each year the accumulated interest also receives interest?
      So one year's simple interest on £10,000 at 2.528% is £252.80.
      £252.80 times 17 is £4297.60
      So the accumulated sum after 17 years of simple interest would be £14,297.60 rather than £15,287

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