Sarah Laing takes a look at the changes specific to the Treasury backed NSI products.
As bank rates remain at near record lows, many consumers are frustrated with very tiny interest rates on traditional savings accounts.
One of the main benefits of investing in National Savings & Investments (NSI) products is that they are seen as being ‘safe’ investments, being backed by the Treasury. The various NSI schemes offering gross returns have become more attractive now that tax at 20% is deducted at source from most forms of saving income provided the return is competitive.
Premium bonds
Premium bonds cannot really be called an investment - they are a gamble that the interest forgone on the capital will result in a substantial win in a prize draw. The minimum investment is £100 (or £50 if bought monthly on standing order) and the maximum holding until 30 May 2014 was £30,000. However, from 1 June 2014 the investment limit was increased to £40,000 and it is set to rise again to £50,000 from spring 2015.
Prizes range from £25 to £1 million and all winnings from premium bonds are free of UK income tax and capital gains tax. The odds against a £1 bond winning in a particular month are currently approximately 26,000:1. From 1 August 2014, there will be two top monthly prizes of £1 million each.
The size of each month’s prize fund is set by allocating the equivalent of one month’s interest on the total value of eligible bonds. The annual rate was 1.3% as at June 2014.
Premium bonds can be cashed in at any time without the need to give notice. Investors need to be aware that inflation can reduce the true value of premium bonds over time.
Income bonds
Income bonds are often used as a simple way of earning additional income every month. There is no fixed investment term. Interest rates are variable and monthly income is paid directly into a bank or building society account. The minimum investment is £500 and the maximum is £1 million per person in total. Interest is paid gross, but is taxable. Under current interest rates (1.25% gross/1.26% AER), a £40,000 investment would provide a monthly gross income of around £41.67.
Children’s bonus bonds
Individuals can invest a minimum of £25 on behalf of children under 16, up to a maximum of £3,000 per child per Issue. A bonus is added on the fifth anniversary of purchase, and all returns are totally exempt from UK income tax, even if funded by a parent. The current Issue (Issue 35) is paying a guaranteed rate over five years of 2.50% AER. This means that the maximum investment of £3,000 would yield a return of £3,394.22 after five years.
New accounts for 65 and overs
For people aged 65 or over, the 2014 Budget announced that NSI will launch a choice of two fixed-rate, market-leading savings bonds, available from January 2015. These will provide certainty and a good return for those who have saved all their lives and now rely on their savings for income.
Whilst the exact details of the bonds will not be finalised until the autumn, the government’s current assumption is that NS&I will offer products which would pay rates of 2.8% gross/annual equivalent rate (AER) on a one year bond and 4.0% gross/AER on a three year bond under current market conditions, with an investment limit of £10,000 per product. These will be taxed in line with all other savings income.
Practical Tip:
Although low interest rates mean that returns on savings income will invariably be quite low, there are still a few tax-efficient savings products on the market. Along with other new measures designed to help increase returns or boost income, it is always worthwhile keeping a careful eye on rates and investment products available – be prepared to switch things around as and when appropriate. Consider taking advice from an independent financial adviser where appropriate.
