Critique of new inflation proof 5 year bonds

Yeah, 5 years is a long time, but as an unsophisticated member of Joe Public I'm tempted by the PO thing, despite the lack of compounding.

At least the PO offering seems to give 1.5% over the RPI every year. From how I read the Yorkshire offering, which quotes an APR of just 0.29%, it seems what you get back from that at the end is the whole of the RPI uplift plus just one lot of 1.5%.

Do you mean that May is traditionally a time of high RPI every year? If so, this should not matter as it will be measured again every May.

"Locked in" doesn't rally describe well what happens. The feature is that the RPI rise is measured every year, and if negative is ignored. Then 1.5% is added. The corresponding results for each of 5 years are added together and that represents your flat interest for the whole period.

Indeed. 1.5% is the flat annual rate, i.e. if inflation were zero for whole time, then your return would be 7.5% for 5 years, which corresponds to an AER of 1.46%.

The inflation component is not compounded either. If inflation were 4.5% in each of the 5 years, you would get 6% each year, a total of 30%, which corresponds to an AER of 5.39%.

The wording in the YBS product is misleading. The 1.5% quoted is not an annual rate, it is the 5 year rate, corresponding, as they say, to an AER of 0.29%. But on the other hand the inflation component *is* compounded, because it is calculated by reference to the period start and end values of the inflation *index*. In other words, if inflation were 4.5% in each of the 5 years, the index would go up not by 22.5% but by 24.6%, and that's what you'd get (plus the 1.5%, making 26.1% altogether, or 4.75% AER).

So whilst in broad terms the PO are paying inflation+1.5%, YBS are paying inflation+0.3%, which is almost as "party" as you say BMS are.

These are bonds issued by the Bank or Ireland (according to the PO website). What chance they will go under or cut bond holder's funds?

Up to £85K per person, you're fully covered by the UK Financial Services Compensation Scheme anyway.

IIRC the last set of NS+I index-linked bonds (when you could buy them,) gave RPI + 1% pa compound for the 5 year bond and were not subject to income tax. You could also terminate early without too much damage.

The penalty for terminating early in the Post Office (bank of Ireland) offering is not defined and it "will be calculated and advised to you at the time your request is made and will be deducted from your capital, meaning you could get back less than you invested." that's a bit worrying.

Robert

Also, I note that you pay income tax on the income year by year even though you cannot get at the money until the end of the term.

Robert

But surely that's no different from fixed are bonds over the same term?

I suppose that is so, although I wonder if some bonds manage to return part of the growth as a capital gain rather than income? But I was really comparing against the NSI index-linked bonds. Presumbaly these new products have sprung up to fill the gap left by the former NSI offerings.

Robert

Where have you got this from?

The flyer that the YBS sent me says RPI plus 0.1% (plus an additional 0.5% - over the whole term, if you invest by, um today!).

Having read the leaflet I want to know what the following means:

"Your money is protected in the same way as any other bank or BS account you have. Should YBS default, there is no protection provided by Credit Suisse (described earlier as the "Account manager") or any other third party and you could lose some or all of your investment."

Surely the Bank deposit protection scheme is a "third party", don't they protect the investment?

tim

Got it from here;

But as some say...this 1.5% is not per year but over the 5 years. But I see what yu mean about credit suise; If it's offered by credit suise how can the ybs protection cover that I ask myself?