Savings Bonds Guide
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A savings bond is a fixed-term savings account which earns high rates of interest.
They bridge the gap between basic every day savings, such as savings accounts or cash ISAs, and more adventurous stocks and shares investing.
On one hand, like a savings account, they are low risk and guarantee you will - at the very least - receive your original capital back at the end of the investment plus the return. However, they also offer high rates of interest at a fixed rate for the entire term of the bond.
Bonds usually last for between one year and five years. The longer the term, the more interest the provider usually offers.
To open a bond you need a lump sum of money. The minimum amount required varies from product to product, however you would normally need at least £500 to open a one-year bond. You can keep investing money - up to a maximum amount stated by the provider - until the "issue period" is closed. This period usually lasts for around a month after the date the bond is launched. After this time the bond closes to new investments and the cash is invested by the bank. You can find regular savings bonds, however, where deposits can be made throughout the term of the product. Interest is added either at the end of the bond's term or annually, depending on the product.
Who are Savings Bonds for?
Savings bonds are designed for people with a lump sum of money which they would like to save and earn interest on. Anyone who would like to earn high interest rates without taking the risk of investing in stocks and shares is likely to be the ideal candidate.
Pitfalls of Savings Bonds
Savings bonds are very restrictive. They effectively lock your savings in for a set period of time and require you to give quite a bit of notice - as much as three months in some cases - if you wish to withdraw money. It's very likely you'll receive a financial penalty for doing so.
Most savings bonds also prevent you from making additional deposits after the issue period. If you expect to receive more money, after the issue period has closed, you will have to invest this elsewhere.
A healthy rate of interest is usually offered by savings bonds providers. But, remember, this is taxed. If the lump sum you are investing is the same as your ISA allowance for that year, you would be better off investing in an ISA where interest is not taxed. It is certainly worth calculating whether the rate of interest in the bond is higher than the non-taxed return offered in an ISA.
Where to buy Savings Bonds
There are many savings bonds providers. High street banks, building societies, investment companies and private banks are all key players in the market.
Savings bonds become available at certain times of the year for certain periods. You will see adverts, articles and leaflets in your local bank or building society branch advertising the latest offering. They make the bond sound as if it's only available for a limited period. And, while this is true, what they don't always tell you is that a new "issue" of the bond will usually appear a few months down the line too.
As with all financial products, make sure you scour the market and compare rates and conditions to find the product which suits you.
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