Age-net takes a look at recent changes to the way we save with the introduction of Guaranteed Growth Bonds
The January financial market has seen a huge boost to silver savers with the launch of the Guaranteed Growth Bonds. The special issue bonds went live on January 15th, and the demand has been immense.Back in April last year, the Chancellor announced that there would be support for older savers and now it is finally here.
A day that changes the savings stratosphere for the long-term.
How will the banks react?
Slowly, as so far there is only a 0.1 percent increase by Virgin Money.
No more are you tied into 1.9% savings rates in the bank, watching your income dwindle with every month that goes past.
With the Guaranteed Growth Bonds, you’re able to get a lock in a 4% interest rate on a three-year bond, and 2.8% on a one-year bond. Interest rates that no high street bank has yet or likely to price match.
The bonds are exclusive to NS&I, fully supported by the Government, and backed by £10 Billion in investments.
When the £10 Billion limit is reached, the bonds will be withdrawn from the market. And there’s no guarantee they’ll be seen again.
It was predicted in early December that the issues would sell out within weeks, but with the amount of investment, that is now expected to be a matter of months.
If you’re on the fence, it’s time to start serious financial planning.
What a bond is
To put it simply, a bond is just another name for a fixed term savings account. You invest whatever you like, within the requirements of being between £500 and £10’000 per issued bond, and it will be tied up until the bond matures.
These bonds are offered in two types. A one-year bond and a three-year bond. The longer you invest – the higher interest you get.
What happens if you need to withdraw before the bond matures
You can withdraw all or part of your investment at any time. You do not need to wait until the bond matures. What will happen though is you will have 90 days of interest deducted from the value of your bond. That’s the penalty attached to the bonds if you decide to withdraw.
For that reason, if you withdraw your investment within the first 90 days, you will find yourself losing money, instead of earning the higher rate of interest.
It’s well worth remembering that there is a penalty for early withdrawal, so think carefully before you invest more than you can comfortably afford.
Who the bonds are for
Since last year, there has been a lot of advertising for the release of these bonds, and the marketing has been geared to retirees. That has caused some confusion, because you only need to be the retirement age. Not actually retired.
As long as you are 65 years or older, you can invest in these bonds.
Other eligibility criteria
Despite all the good news of higher interest rates available, they are only made available with a criterion that you will have to meet for eligibility.
The minimum you can invest is £500, and the shortest fixed term available is a one-year bond. That will pay 2.8% interest, and will be taxable.
Due to demand and to ensure that as many savers as possible can access the investment opportunity, there is a limit of £10’000 per bond issued. However; remember that there are two types of bonds. A one-year and a three-year. If you take advantage of both those issues, you can invest £20’000 each, taking you to a total of £40’000 per couple.
When you receive your interest
Interest is only paid when the bond matures. If you invest in the one-year bond, interest will be paid one-year from the date of your application.
For three-year bonds, the interest is applied but cannot be withdrawn as this is a fixed term investment.
If you prefer to have your interest paid monthly, then you would need to do some calculations so that you aren’t investing as much as you can, but instead work out how much interest you will be paid when the bond matures, and deduct that from your initial investment.
An example would be a £10’000 investment going into a three-year bond paying 4% interest annually. On maturity, you’d receive £10’832. Take the £832 and put that into an instant access account, and withdraw around £23 per month, and deduct that from your initial investment, so you only put in £9168, paying you £747 when the bond matures.
Over the three-year term of the bond, if you were to lower your maximum to account for monthly interest, it’d cost you £85.
The figures used in the example above, are not accounting for tax. Interest will be taxed. If you’re a non-tax-payer, you will have to contact the HMRC for a refund, as the interest is paid net of tax and not gross.
Tax information
Ns&I are not part of the R85 scheme, which from April 2015, allows non-taxpayers to be paid their interest gross and not net. For that reason, if you are a non-taxpayer, you will still have your interest deducted by 20% and then you will have to claim a refund from the HMRC.
Basic rate taxpayers do not have to pay any more tax as it’s already deducted. As this is taxable income, if you are required to fill out a tax return, you will need to declare this.
For higher rate taxpayers, only the basic rate of tax will be paid, and you will have to make up the difference on maturity of the bonds.
Overall, the bonds are a good step forward, enabling to get more from your savings, but as with anything relating to your personal finances, it’s wise to speak to someone qualified to give you professional advice on whether the bonds will be right for you.
Financial Security
All investments are fully secured by the Government. The only way you can lose money is if you withdraw early.
Since the credit crisis struck, senior savers have been hit hard with lower interest rates, of which millions have had to take a back seat and watch their savings dwindle.
The release of the bonds is aimed at rewarding those who have saved hard for their retirement, by offering the highest interest rates currently available.
The downside of course is that you have to lock your savings away in the bond for a one-year or three-year term, and there is no option to receive interest monthly.
Add to that the fact that the income is not a tax-free investment, you have 20% at least coming off the top paying three-year bond of £832, leaving with around a £666 return. Even less if you’re a higher rate taxpayer.
That’s why you should speak to a qualified financial advisor to help you decide if the Guaranteed Growth Bonds are a good fit for you.
