In the Chancellor's hands

National Savings offer some of the safest investments around. Abigail Montrose gives the details for people looking for a government home for their money
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The Independent Online
If you have never thought of Ken Clarke as your friendly bank manager, now may be the time to do so - because for people who are looking for a safe, tax-efficient home for their money, National Savings offer some of the best deals around. Like Tessas (tax-exempt special savings accounts) offered by banks and building societies - which also benefit from tax concessions by the Chancellor - they are a suitable home for your savings over five years or more.

The first National Savings Certificates were issued by the government in 1916 to raise money for World War I. National Savings now operate a whole range of savings schemes - many of which are entirely tax free. Added to this, you can be sure that your savings will be safe, since you are effectively banking with the Government.

National Savings offer three tax-free savings schemes: Fixed-Interest Savings Certificates, Index-Linked Savings Certificates and Children's Bonus Bonds. These schemes are usually best compared with Tessas, as they are all five-year tax-free savings schemes.

l Fixed Interest Savings Certificates guarantee to pay out a fixed rate of interest, equivalent to 5.35 per cent a year, as long as you keep them for five years. There is no tax to pay on the interest, but if you cash in the certificates early you will receive a reduced rate of interest.

The minimum investment is pounds 100 and the maximum is pounds 10,000, or pounds 20,000 from earlier Certificates which have now matured.

l Index-Linked Savings Certificates are suitable for people who are looking to ensure that their savings are proof against inflation. As long as you keep the certificates for the full five-year term, your savings will rise in line with inflation, and by an additional 2.5 per cent a year. The interest on your savings is tax free.

The minimum and maximum investment levels are the same as with Fixed- Interest Savings Certificates.

l Children's Bonus Bonds: These can be bought by anyone over 16, for children under 16. The bonds pay a set rate of interest for every five- year period they are held, up until the child's 21st birthday.

The current issue of bonds guarantees to pay 6.75 per cent a year tax- free for the next five years. The bonds must be held for the full five- year period if they are to receive the guaranteed rate, and the interest is received only when the bond is cashed in.

The minimum amount that can be invested in Children's Bonds is pounds 25, and the maximum holding in any issue is pounds 1,000.

l Tessas are issued by banks and building societies, and you can hold only one at a time. You can invest up to pounds 9,000 over five years in your first Tessa, but if you have already had one Tessa, which has now matured, you can invest all the money from it in a second one - so long as no more than six months elapses between the first one maturing and your investing the proceeds in a follow-up account.

Most Tessas pay a variable rate of interest, but there are a number of fixed-rate ones around. If you want to know exactly how much interest you are going to earn over the account's five-year term, then you may prefer to put your savings into a fixed-rate Tessa.

The general view at present is that interest rates will rise over the next five years, and so most banks and building societies are offering variable-rate Tessas. But some of the fixed-rate offers are still attractive.

So when are National Savings better than Tessas? Well that depends on what you want from your investments. If your main objective is to ensure that your savings keep up with inflation, perhaps because you are retired and on a set income, then Index-Linked National Savings Certificates are for you. Inflation may be low at present, but in the days when it soared to 15 per cent and more, these types of certificate were unbeatable.

If you are just looking for your savings to grow, and do not want to take any risks, then Tessas or National Savings Certificates are both appropriate.

If you are looking to set up a savings scheme for a child, then Children's Bonus Bonds offer better value than Savings Certificates.

You also need to look at how much you want to save. The limits on Children's Bonus Bonds and Tessas are relatively low, so you may find that once you have used up your allowances on these you have money left over and will need to invest the rest of your savings elsewhere.

In that case, index-linked or fixed rate Savings Certificates may be the answer

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