InvestmentsOct 2 2013

Q&A: What NS&I products can offer for savers

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A: National Savings and Investments is one of the largest savings organisations in the UK, offering a range of savings and investments to over 25 million customers. All products offer 100 per cent capital security, because NS&I is backed by HM Treasury. Some of the products NS&I have are as follows (although they may not always be on general sale):

Fixed Interest Savings Certificates (no issues currently on general sale)

These are lump sum investments for a set period of time called a ‘term’. For the length of the term you invest in, they earn interest at rates that are guaranteed from the outset. The returns from fixed interest savings certificates are tax-free – this means that you don’t have to pay any UK income tax or capital gains tax on the interest you earn. They may be wholly or partly repaid before maturity, so regular withdrawals can be made, however a penalty may apply. Since 20 September 2012, all investments made or reinvested on or after this date incur a penalty for early repayment equivalent to 90 days interest deducted from the amount being cashed in.

Index-linked Savings Certificates (no issues currently on general sale)

When on general sale these are subject to a minimum purchase of £100 and there is a maximum limit of £15,000 in each Issue per person. Each year their value moves in line with the retail prices index. If the RPI goes up at the anniversary of your investment (compared to the previous anniversary), so does the value of your certificate. But if RPI goes down, the value of your investment is protected and will not go down. As well as the index-linking, the investment also earns interest each year at a guaranteed rate. The returns from index-linked savings certificates are tax-free – this means that you don’t have to pay any UK income tax or CGT on the index-linking and interest you earn. They may be wholly or partly repaid before maturity, so regular withdrawals can be made, however a penalty may apply. Since 20 September 2012, all investments made or reinvested on or after this date incur a penalty for early repayment equivalent to 90 days interest deducted from the amount being cashed in. These are ideal for savers who wish to protect their capital in real terms.

Income Bonds

When you invest in income bonds you receive the interest as a monthly income – how much you receive depends on how much you have invested and the current interest rate. Your money will earn a variable interest rate, with no risk to your capital. However, with variable interest, you might find that the rate goes down meaning you would earn less interest. On the other hand, the rate could go up. Taking money out is also simple with no notice or penalty. Interest is paid gross, if you are a taxpayer you will need to declare you interest and pay any tax due.

Guaranteed Income Bonds (no issues currently on general sale)

You can invest for a set period knowing exactly what rate of return you will receive. The minimum holding is £500, and the maximum £1m per issue per person. Withdrawals made before the end of the term are subject to a penalty equivalent to 90 days interest deducted from the amount being cashed in. The interest earned on guaranteed income bonds is taxable, interest is paid with basic rate tax deducted (currently 20 per cent). If you pay tax at the basic rate, you will have no more tax to pay on the interest. If you pay tax at the higher or additional rate, you’ll need to declare the interest to HMRC and pay any further tax due. If you are a non-taxpayer, or entitled to have any of your interest taxed at the starting rate for savings income, you can apply to HMRC for a refund.

Guaranteed Growth Bonds (no issues currently on general sale)

You can invest for a set period knowing exactly what rate of return you will receive. Again, a minimum of £500 and a maximum of £1m may be held per issue per person. Withdrawals made before the end of the term are subject to a penalty equivalent to 90 days interest deducted from the amount being cashed in. Interest is added to the bond on each anniversary of the investment. If you choose a term of more than one year you will get the benefit of ‘compound’ interest. The interest earned on guaranteed growth bonds is taxable, interest is paid with basic rate tax deducted (currently 20%). If you pay tax at the basic rate, you will have no more tax to pay on the interest. If you pay tax at the higher or additional rate, you’ll need to declare the interest to HMRC and pay any further tax due. If you are a non-taxpayer, or entitled to have any of your interest taxed at the starting rate for savings income, you can apply to HMRC for a refund.

Children’s Bonds

These are for children under the age of 16. The minimum investment is £25, the maximum holding for each child is £3,000 in each issue and the investment term is five years. Interest is added at a fixed rate each year for five years and is tax-free for both the child and parents. The bonds mature at the holder’s 21st birthday, but can be cashed in before the child reaches age 21. Since 20 September 2012, all investments made or reinvested on or after this date incur a penalty for early repayment equivalent to 90 days interest deducted from the amount being cashed in.

Ben Chaplin is managing director of Taxwise