Money Basics: British Savings Bond – we’ve been expecting you

British Savings Bonds were announced by the Chancellor Jeremy Hunt at the Spring Budget in March and are now on sale – but how do they stack up compared to other savings accounts? asks Christian Leeming

 
British Savings Bonds are a new type of savings account with an interest rate of up to 4.15% being offered by the government to help people save for the long term.

They work in the same way as other bonds in that they are an ‘IOU’ – you lend the government your money over a fixed period of time – in this case three years – at the end your ‘loan’ is repaid along with a guaranteed interest payment.

Issued by National Savings and Investments (NS&I) savers can choose between two options – Guaranteed Growth Bond and Guaranteed Income Bonds.

Whichever one you choose, there is a minimum investment of £500, and maximum subscription of £1m.

If you choose the ‘Growth’ version your money will be locked away for three years and you will earn guaranteed interest at 4.15% gross Annual Equivalent Rate (AER) over this time; after three years, you’ll receive your original investment back, plus the interest.

The ‘Income’ version offers a guaranteed monthly income at a rate of 4.07% gross or 4.15% AER.

The accounts are available through NS&I, the government’s savings bank, and aim to help raise more money for the government.

Because of the minimum subsrciption, and the duration of the loan – you cannot make withdrawals -British Savings Bonds are likely to appeal to the relatively well-heeled, with the ability to invest for the longer term.

Those choosing the Income Bond version, will receive monthly interest payments into their bank account; they are likely to appeal to retired people needing income to live off.

Those not needing regular income may prefer the ‘Growth’ option, which means the interest is rolled up and added to the bond each year.

For those who consider safety first, British Savings Bonds offer a safe and secure place for their savings;  most banks will guarantee savings up to £85,000 under the Financial Services Compensation Scheme, although NS&I covers 100% of your savings.

The security of a fixed rate can also provide comfort, particularly as it is widely expected that interest rates will begin to fall in the summer.

However, the fact that once in, your money is locked into the bonds, may be a consideration for those that may need access in an emergency; this is probably cash beyond the rainy day fund.

There are also many other fixed rate bonds on the market, so it pays to do some research; the 4.15% interest rate on offer means that British Savings Bonds are a long way from top of the comparison tables, with 27 other providers offering three-year bonds with higher interest rates.

NS&I’s offer of ‘100% secure saving’ may offer reassurance to some, but at a price; the top three-year bond is 4.63% from a handful of providers, meaning that if you had £5,000 to save you’d be giving up £24 a year of interest by sticking it in British Savings Bonds – or £2 a month. At the maximum savings of £1 million you’d be giving up £4,800 of interest a year.”

Another factor is tax; unlike Premium Bonds, for which NS&I is best known, British Savings Bonds are not tax-free, which means you will pay tax on your interest once it breaches your Personal Savings Allowance (PSA).

The PSA means a basic rate tax payer can earn up to £1,000 in interest before they are taxed, £500 to higher rate tax payers and £0 for additional rate tax payers; if you’re likely to face a tax bill for the interest an ISA would probably be better for your cash savings.