A National Treasure?
Since the article last month, there have been a few developments. The stockmarket fell, and then rose by 18% in about 3 days. Our troops are already at war. Oh yes, and Scotland lost again to England. Enough of that though.
As the stockmarkets are still volatile, I thought I would turn my attention this month to some guaranteed products. Of course, I am referring to National Savings. There are those who would say that the performance of these products is about as exciting as watching paint dry - but not me.
Many investors have become disillusioned with the returns from the stockmarket, with the result that there is a resurgence of interest in these "dull" investments. Given that the government are ultimate guarantor of National Savings & Investments (NS&I) products and that they offer this 100% guarantee, it is not surprising that this security is found to be desirable. The Treasury backed bank which was launched in 1956, has a reputation for being safe, boring and unattractive.
As there are many products offered by NS&I, and they are all deposit based, it would be silly to try and mention them all in this column. Instead, I have selected a few that I feel can offer investors some areas of interest. They are of course not for everyone.
The products I will discuss are all tax-free investments. First I would draw your attention to the Savings Certificates that are on offer just now. There are two types - fixed rate and index linked issues. They are available as 2 or 5-year investments.
Fixed Rate Certificates
The 2-year certificates offer a rate of 2.40% and the 5-year certificates offer 2.70%. The equivalent returns taxpayers at 22% and 40% tax are 3.00% and 4.00% for the 2-year plans and 3.30% and 4.50% for the 5year plans. Whilst these returns are not fantastic, we should remember that inflation is now at 3.00% and real returns from deposit accounts are dismal and of course, can be reduced further by income tax. Since investors can place up to £10,000 in each issue and there is an average of two issues per year, investors can place up to £40,000 tax free.
Index Linked Certificates.
Again, these are available for 2 or 5-year periods. They offer index linking plus 0.5% and 0.80% respectively. That is equivalent to 3.50% and 3.80%. Once again, if these figures are "grossed-up", they become 4.50% and 6.30% for basic and higher rate taxpayers. As long as inflation remains at thee levels, these returns may look quite attractive and no longer "dull".
Guaranteed Equity Bonds.
The latest issue of these, (issue 4) is a five year investment and offers investors up to 60% of any growth in the FTSE100 index over the term, plus a guarantee of their money back at the end of the term. Investment limits are between £2,000 and £1m.
Premium Bonds
Investment limits are between £100 and £20,000. Each £1 bond has a separate and equal chance of winning tax free cash prizes of between £50 and £100,000, or the £1m jackpot. The currebt prize fund rate of 2.40% translates to an equivalent return of 3.75% for higher rate taxpayers and 2.80% for basic rate taxpayers. This assumes that bondholders have average luck in winning prizes. The odds of a bondholder winning a prize are 28,500 to one. That seems better than the lottery. Sometimes, these are ideal places to hold money, pending investment.
Cash Mini ISAs and Tessa ISAs
These investments work under the same rules as deposit based ISAs offered by other issuers, such as banks and building societies. The rates offered under the NS&I plans are set at 3.80% just now. The NS&I plan also meets the Government CAT standard on charges and terms so the rate cannot fall more than 2 percentage points below the base rate.
Finally...
National Savings products have been a popular way to save since the service was set up in 1861 as the Post Office Savings Bank. Despite the fact that they are regarded by many as "dull", I think they can have a part to play for some investors.
As always, you should talk to your independent financial adviser before making any investment. Because something is tax free does not necessarily mean it is good.
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