Inflation And Interest Yield

When assessing the security of capital in any investment, whether money-deposit or any other kind, you should bear in mind the consequences of continuing inflation. For example, if you invest £100 on deposit at 15% gross for a year, and draw out the £100 capital at the end of the year, the money at that time will not buy as much as it would have done at the beginning of the year if inflation has been running at, say, 18% during the year. After a year your £100 will be worth only £82 in current money.

To make an investment really worthwhile from a yield point of view, the interest rate should be sufficient to give you not only a reasonable tax-paid yield in income, but also compensation for loss in value of your capital. To be compensated for a loss of 18% from inflation, you need a tax-paid interest rate of 18% grossed up for tax. At basic-rate income tax this works out at (18 � 70 x 100) 25.7%. You would also need some addition to that rate to provide any real return at all. In short, without a gross interest yield of at least 30% there is no prospect of making a real return on investments in 2015 conditions - the best rates are therefore negative.


SAYE (3rd Issue - Index-linked)

The SAYE 3rd issue is much more interesting. You have to contract to save an amount of from £4 to £20 a month for five years. You get neither interest nor bonuses. But the repayment value is linked to the Retail Price Index, so this is an inflation-proofed investment. So long as inflation proceeds at a rate higher than the going net-of-tax interest rate on deposits, this will be impossible to beat for yield.

Again, there are penalties for not keeping to your contract. You get nothing except your original contributions back if you stop before the end of 12 months; stop after a year but before... see: SAYE (3rd Issue - Index-linked)


Refunds, Personal And Business Finance 2017

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