ns&i index linked bonds

I have seen a reference on citywire money to ns&i index linked bonds.

One person – nodrog60 – has an issue with advice he was given over the phone by ns&i. As a result he thinks the interest on his investment will be a pittance. Amongst many others one person – ND – has been very helpful and given a concise reply explaining why he should get a better return. He has not just made what would amount to a passing remark like, “You should read the brochure.” he has understood how it is that people have genuine difficulty understanding these arrangements and carefully laid out his explanation in detail with arithmetic and examples so we can all see his point of view.

I commend ND for his very helpful reply. He is obviously a very helpful person and deserves a mention. I quote him here:

[In reply to] nodrog60,

You have made a very common mistake in understanding what “RPI” means and it sounds like the folks at NS&I you talked to didn’t explain things very well either, but it’s nowhere near as dire as you believe.  Read on and I’ll explain…

RPI is actually not a percentage, the percentage is RPI inflation, i.e. the change in RPI, which is the Retail Prices Index.  It’s understandable that you’ve misunderstood this as just about everyone uses the two interchangeably, even the ONS themselves!

The Retail Prices Index reflects how much it costs to buy a basket of goods, and was set at 100 in January 1987.  Now, the most recent figure is for February 2012, and the Retail Prices Index figures for that and the previous two Februarys are:

Feb 2010  219.2

Feb 2011  231.3

Feb 2012  239.9

So, a basket of goods that cost you £100 in January 1987 would have cost you £219.20 in Feb 2010, £231.30 in Feb 2011, and £239.90 in Feb this year.

That’s the Retail Prices Index.  RPI inflation, i.e. the change in the RPI, across those Februarys was:

Feb 2010 – Feb 2011 : (231.3 / 219.2) – 1 = 5.5%

Feb 2011 – Feb 2012 : (239.9 / 231.3) – 1 = 3.7%

Now, the common mistake you are making is in thinking that where the NS&I T&Cs say that in the event of a decrease in the RPI level you will only get the 0.25%, you are thinking that refers to the RPI inflation % figure, and seeing that the % rate of inflation has decreased you (wrongly) believe you’ll only get the 0.25%.

However, where the NS&I T&Cs talk of “the RPI level” they are referring to the Retail Prices Index — the 231.3, 239.9, etc — not the %.  The %age dropping just means that the rate of inflation has slowed, but prices — and the index — are still going up and you’ll get a return from the bond commensurate with that.