Investing In National Savings
National Savings (NS) are investment products provided by the government and are therefore a way for the government to borrow from the public. They are mainly longer term investments. There are minimum and maximum investment amounts for each.
In every case the capital value remains intact. Interest rates may be variable or fixed for the period of investment. In the latter case, as general interest rates change, the current issue may be closed and a new issue opened at a higher or lower rate. (The word 'issue' is used to describe the product currently available in each category.)
Interest may be tax free, taxable (paid gross) or taxed (deducted at source). In some cases interest is paid out; in others it is kept in till maturity.
Some interest rates are not reasonably competitive at present. Current rates and investment limits are available from post offices, in newspapers, on Ceefax/Telefax or on the Internet.
Where there are relatively low limits on investment, such as for savings certificates (£10,000), two people, in addition to each investing the full amount, can hold a further investment in trust for each other, thus doubling their joint holding to £40,000.
It is also possible to create an income (albeit delayed) from a product which does not pay out interest, such as Savings Certificates, by buying a series of certificates of the minimum investment (in this case £100). If they are purchased in successive months, then three or five years later they will be cashable in successive months.
There is a National Savings Investment Guide which will help you choose between the wide range of products. This, and separate leaflets about each product, are available at post offices.
Savings certificates
There are two kinds those which pay a fixed rate of interest and those which are index linked, i.e. interest is at a fixed rate above inflation (as measured by the retail price index). There are also two investment periods, two years and five years.
The limits to investment for the current issue are £100 minimum and £10,000 maximum. In all cases certificates must be held for the full period to obtain the full interest rate but they can be cashed in earlier at lower rates.
Interest is guaranteed for the period, is kept in and is tax free, making such certificates of particular interest to higher rate taxpayers.
On reaching maturity, certificates need to be cashed in or transferred to the current issue (which doesn't breach the limit); the money can be left in but the rate of interest for matured fixed interest certificates falls to the general extension rate (2.01 %), a much lower rate which applies to all NS products which have passed the initial investment period.
Children's bonus bonds
These can be bought in units of £25 for a child (under 16), who can hold up to £1,000 in each issue until reaching the age of 21. Interest is guaranteed for five years, is kept in and is tax free.
Pensioners' bonds
These are only available to the over 60s. There are three Periods for investment one, two and five years. Interest is guaranteed for the period, is paid out monthly and is taxable, for which reason they are mainly of interest to the non taxpayer.
The minimum investment is £500 and the maximum £1 million for all issues.
Capital can be withdrawn before the period is up, but two months' notice is required and no interest is paid for that period. Alternatively, immediate withdrawal is possible, subject to the loss of 90 days' interest.
Withdrawal after the period is up must be requested within two weeks of the expiry date; otherwise another period of two or five years starts. Reminders are sent.
Capital bonds
The term is five years and interest is guaranteed. The minimum investment is £100 and maximum £250,000.
In this case gross interest is added to the bond annually and is not paid out till maturity, but is then taxable. (An annual statement is sent for income tax purposes.) Early withdrawal is possible but there is an interest penalty.
These may be of interest to higher rate taxpayers who already have the full allowance of savings certificates and do not need regular income.
Income bonds
These are similar to capital bonds but interest is paid out monthly, so they are of more interest to those who require a regular income. However, interest is variable and is taxable.
Three months' notice is required for withdrawals, although immediate withdrawal is possible subject to the loss of 90 days' interest.
The minimum investment is £500 and the maximum £250,000.
Fixed rate savings bonds
These bonds earn a fixed rate of interest over set periods of time six months, one year or two years. Rates are tiered so the more you invest and/or the longer the period, the higher the rate.
interest is guaranteed for the period, can be left in or taken out monthly or annually (at slightly lower rates) and tax is deducted. There is an interest penalty for cashing in early.
The minimum investment is £500 and the maximum £1 million.
Investment account
This is more like a bank deposit account than the other NS products and is convenient for small savers. You can deposit a minimum of £20 at a time. One month's notice is required for withdrawals but these can be immediate, subject to the loss of one month's interest. Deposits and withdrawals are made at post offices.
Interest is taxable and can be taken out or left in. Interest rates increase with the amount deposited, in seven bands ranging from under £500 to over £50,000. Current rates are lower than the best building society rates.
Ordinary account
This is like a bank current account and is also convenient for small savers. You can deposit as little as £10 at a time. However, there are no cheque books or other facilities such as standing orders.
The interest rate is low but is tax free for amounts of up to £70 a year.
Deposits and withdrawals are made at post offices. Up to £100 can be withdrawn on demand; larger amounts take a few days.
Premium bonds
This is the only form of gambling where you do not lose the stake! An average return on a large investment can be expected in the long run of over 3% and of course there is the chance of a big win. On the other hand, with only a small investment you can go on for years without winning any prize.
The minimum purchase is £100 and the maximum holding is £20,000. The top monthly prize is £1 million and there are many prizes of lower amounts. Winnings are tax free.
All investors (and particularly higher rate taxpayers) should consider putting some money into premium bonds.
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