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Savings bonds

About savings bonds

If you're thinking about putting some money aside for a rainy-day, one option is to put it into a savings bond.

Savings bonds are available from banks, building societies and National Savings and Investments (NS&I).

You agree to put your money into a bond for a fixed period of time. This is between one and five years and is called the term. You will have to put in a minimum amount of money which is usually between £500 and £1,000.

You get interest on your money, which can be paid at either a fixed or variable rate. Variable means the rate can go up or down.

The interest you earn is generally higher the more money you put in. If you leave your money in for more than a year, you may also get a higher rate.

You may want to look at taking out a savings bond if:

  • you have a lump sum to save
  • don't want to take much risk with your money
  • you want to save for a period of no longer than five years.

Savings bonds can also be useful for people who want to earn an income from their savings, such as pensioners who want some extra money to top up their pension. This is because with many savings bonds you can choose to get your interest monthly if you want to, rather than once a year.

Savings bonds are a safer option than putting your money into stocks and shares and you can earn more interest than in an ordinary bank or building society savings account.

On the other hand, there are some drawbacks:

  • you won't be able to get hold of your money easily
  • you may have to pay a penalty if you want to take out your money early or, with some bonds, may not be able to take your money out early at all
  • With guaranteed equity bonds, if the stockmarket does well, you won't make as much money as if you had invested directly in stocks and shares.

There are several different types of savings bonds which all work in slightly different ways. The main types of savings bond are:

If you're interested in taking out a savings bond but aren't sure whether this is the right option for you, you might want to get independent financial advice.

Fixed-rate bonds

Fixed-rate bonds are available through banks, building societies and National Savings and Investments (NS&I).

If you have a lump sum to save, fixed-rate bonds can offer very good rates of interest compared to bank and building society savings accounts. With some accounts, you only need tie your money up for a year.

You can choose for the interest to be paid either:

  • at the end of the fixed-rate period of time you agreed to (the term) or,
  • as a monthly income.

There are some drawbacks to fixed-rate bonds:

  • you can lose interest if you withdraw your money before the end of the term you agreed to
  • with many bonds, you may not be able to take your money out early at all
  • if you're a taxpayer, tax will be taken from the interest you earn on the bond even though you may not be able to get hold of your money
  • if interest rates go up, you might suddenly find the rate you're getting is a lot lower than what other accounts are paying. But you won't be able to move your money until the end of the fixed term and the value of your savings might go down.

If you think you may need to get hold of your money early or you don’t want to risk losing interest if rates go up, you might want to look at shorter-term notice accounts that pay a good rate of interest.

Guaranteed equity bonds

Guaranteed equity bonds are available through many banks, building societies and National Savings and Investments (NS&I).

Guaranteed equity bonds appeal to people who like the idea of investing in the stockmarket but are worried about losing their money.

These bonds are not strictly investments but savings accounts. You usually have to agree to leave your money in the account for a fixed period of time, often between three and seven years.

The amount of interest you earn is linked to the performance of shares in the stockmarket. Guaranteed equity bonds often follow the performance of the FTSE 100 index. This is the list of the UK’s 100 top-performing companies.

If the stockmarket does well you will earn money. If it does badly, you will get back at least the original amount you put into the bond. This makes Guaranteed equity bonds safer than investing directly in the stockmarket where you can lose everything if the stockmarket does badly.

However, there are some drawbacks.

If the stockmarket does well

Even if the stockmarket does exceptionally well, you won't make as much money as you would by investing directly in the stockmarket. This is because most bonds have a maximum limit on the interest they pay out, which is averaged out over the life of the bond. Also, you won't be paid any dividends, which is the income you get when you invest directly in shares.

If the stockmarket does badly

Because your money is tied up for such a long period of time, you might not be able to get it out and put it somewhere where it will earn more if the stockmarket does badly.

Although you will get back the original amount of money you put in, your savings will have earned nothing. In fact, once the rise in the cost of living (inflation) is taken into account, the real value of your savings will be lower than if you had put them into a notice account or into another type of savings bond.

Monthly income bonds

National Savings and Investments (NS&I) offers a monthly income bond that might appeal to you if you want an income from your savings but also want to be able to get at your money easily.

You can take your money out at any time and you don’t have to leave it there for a fixed amount of time (term), like you do with many other savings bonds.

The minimum amount you can put into a monthly income bond is £500 and the interest is paid at a variable rate. This means the amount of money you earn can go up or down. But if you pay in more than £25,000, you will get a higher rate of interest.

If you decide to take out a monthly income bond, you should compare rates regularly to make sure you're not getting a worse rate than you would from a bank or building society savings account.

There are some drawbacks to monthly income bonds:

  • income bonds may not be right for you if you're saving to give you a lump sum in the future
  • The NS & I monthly income bonds won't give you a guaranteed rate of interest. If you want a guaranteed rate, you may want to think about fixed-rate bonds or bank and building society savings accounts instead.But remember that you will have to tie your money up for at least a year if you choose a fixed-rate bond. You can use a comparison website to help you compare rates.

Premium bonds

Premium bonds are only available from National Savings and Investments (NS&I).

Each premium bond is worth £1 and has its own individual number. You don’t earn interest on premium bonds. Instead, your bonds are put into a monthly draw. If your bond number is drawn you have the chance to win up to a £1 million jackpot prize. There are also more than a million other cash prizes of between £25 and £100,000.

If your bond number is selected, all the money you win is tax free. The more premium bonds you hold, the better your chances of winning.

You can put a minimum of £100 into premium bonds, up to a maximum limit of £50,000. Or you can choose to save a minimum of £50 a month. You can cash in your bonds at any time without any penalties.

There are some drawbacks to owning premium bonds:

  • unless you own a lot of premium bonds, you are taking a gamble that you will earn nothing at all on your money
  • the odds of winning the £1 million jackpot prize are many times lower than winning the Lotto Prize draw.

If you win nothing, or only a small amount, your savings could be worth less than if you had put them into a bank and building society savings accounts once inflation is taken into account.

You can work out whether it's worth taking out or holding on to Premium bonds and use the Premium bond calculator to work out your chances of winning at: www.moneysavingexpert.com/savings/premium-bonds.

Further help

On Adviceguide

The Money Advice Service

The Money Advice Service is a free, independent service. Their website has lots of useful information about financial products, including comparison tables. Go to: www.moneyadviceservice.org.uk.

National Savings and Investments

National Savings and Investments offer a number of financial products which are guaranteed by the Government. They are available through the Post Office, online and by phone. For more information, go to: www.nsandi.com.

Independent financial advice

For help in finding an independent financial adviser, contact one of the following organisations:

Independent Financial Promotions (IFAP)

Website: www.unbiased.co.uk

Institute of Financial Planning (IFP)
E-mail: enquiries@financialplanning.org.uk
Website: www.financialplanning.org.uk

Personal Finance Society (PFS)

E-mail: customer.serv@thepfs.org
Website: www.findanadviser.org

Moneysavingexpert website

The money saving expert website has lots of useful financial information, including price comparison tables for different financial products. Go to: www.moneysavingexpert.com.

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