The Budget confirmed that National Savings & Investments (NS&I) money-raising target for 2013/14 is nil – in other words, all NS&I has to do is match inflows and outflows. At first sight this might look surprising, given that in the current financial year the Government needs to raise nearly £163 billion in cash. The simple truth, however, is that at present NS&I represents an expensive way for the Government to borrow.
This was underlined last month, when the Treasury sold £1.6 billion worth of index-linked stock at its lowest ever yield. The price paid by institutional investors for 0.125% Index-Linked Treasury Gilt 2024 meant that they were accepting a real (inflation-adjusted) return of -1.26% a year if they held the stock to maturity. Negative real returns have been with us for some time, as a result of the Bank of England’s quantitative easing and the pension funds’ desire to match their inflation-linked liabilities. Even so, the fact that big investors are locking in a loss of over 1.25% each year for 11 years gives pause for thought.
The last public issues of index-linked savings certificates, withdrawn in September 2011, offered a real return of 0.5% a year over five years. If you have existing certificates reaching maturity, NS&I will now only offer RPI + 0.15% for reinvestment over three and five years. The new certificates would also be subject to revised terms, which include early encashment penalties. Unattractive as that sounds, index-linked stock for similar periods will give a return of about RPI – 2.5%.