READERS' LIVES: National Savings: the pros and cons

Interest rates for National Savings ... personal pensions ... mortgages . Your queries answered

The Independent on Sunday has recently reported that interest rates are on an upward trend and that there is every chance National Savings rates could go up in the near future. What should I do with my matured National Savings certificates? Should I wait for a rate rise? They are currently earning the "penally" low general "extension" rate.

MW, London

As expected, higher National Savings rates have indeed been announced recently. Income Bonds will be paying out 0.5 per cent more from 5 September, the rate rising to 6.5 per cent, or 6.75 per cent on balances over pounds 25,000. Rates on higher balances in National Savings Investment Accounts went up last week, with the top rate now 5.75 per cent. And the new 11th issue of index-linked certificates pays 0.5 per cent more than the previous issue. You now get inflation, plus 2.75 per cent,

But some rates have stayed the same, including fixed-rate National Savings certificates. The rate on these was deemed to be competitive with things like gilt yields. Of course, that could change at any time. Base interest rates went up again last week and there may be further increases.

The present 44th issue of fixed-rate National Savings certificates pays a rate of 5.35 per cent a year if you hold them for the full five-year time. The return is tax-free and worth the equivalent of 6.7 per cent gross to basic rate taxpayers, 8.9 per cent to higher rate taxpayers. These are good five-year rates, especially for higher-rate taxpayers. Rates might be even better in a month or two - but they might just stay as they are.

The limit on reinvesting matured certificates into the current issue was abolished in April. So you can reinvest as much as you like. The limit for new money is pounds 10,000 for the fixed-rate 44th issue, and the same for 11th index-linked issue.

One other point. It is not quite fair to describe the general extension rate as "penally" low. The general extension rate is what fixed-rate National Savings certificates earn at the end of their five-year life until they are cashed in (or reinvested in the current issue). The general extension rate is 3.51 per cent tax-free, worth about 4.4 per cent to basic-rate taxpayers, 5.85 per cent to higher-rate taxpayers. You can do better (depending on how much you have to invest), but you can also do much worse.

I am 28 and have been paying into a public sector pension for six years. I am now taking up a three-year temporary position in the voluntary sector. There is no pension with the new job. I may rejoin the public sector at the end of three years. Should I take out a personal pension for this three-year period? Should I transfer my existing public sector pension into a personal plan? If I don't, will it remain frozen? Should I wait for the outcome of the current government review of pensions?

EL, Herefordshire

You have already received contradictory advice from two independent financial advisers. Paradoxically, this emphasises the importance of getting more than one opinion. Pensions are a minefield. The wrong move could cost you dearly. It will eventually be up to you to decide who offers the most convincing arguments, but do also consider a third opinion from a fee-charging pensions specialist. The Society of Pension Consultants (0171 353 1688) can give you a list of its members. Here are some further thoughts:

q Check out the precise rules of your existing employer's scheme. As a public sector scheme, it probably offers excellent benefits and may include full inflation-proofing of the pension once it is paid in your retirement.

q The existing value of your pension won't be frozen. There are rules that require deferred pensions to be revalued in line with inflation of up to 5 per cent each year. So it may be sensible to leave your pension rights where they are, even if it turns out that you don't return to a similar public sector job.

q You are only 28 and already have six years of accumulated pension rights behind you. It may not matter if you delay starting a personal pension plan for the next three years. You could wait to see whether you will return to the public sector and, more importantly, whether there is any prospect of a simpler, more flexible and cheaper pension regime.

Specifically, under existing rules, you can backdate payments into a personal pension plan by six or more years and can get backdated tax relief. You can get tax relief on pension contributions to a personal plan of up to 17.5 per cent of your pay (more once you reach 36). So, for example, if you earn a total pounds 60,000 over the next three years, you would then be able to pay pounds 10,000 as a lump sum into a personal plan.

q If you do postpone starting a personal plan now, get further advice in three years' time. It might be appropriate at the time to pay a lump sum into a personal plan and then transfer it into your new employer's scheme, such are the complications of the pension rules.

q In the meantime consider putting what you would have paid into a pension plan into a tax-free PEP instead. This will provide you with the lump sum you may need.

q If, however, you start a personal plan, go for a deal that treats each premium as a single premium. Be wary of plans that require long-term regular premiums and that penalise you heavily if you withdraw early.

We have a pounds 100,000 mortgage divided into a pounds 70,000 endowment loan to be paid off in 13 years and a repayment loan of pounds 30,000 with 22 years to run. We will soon have pounds 20,000 to pay off some of the mortgage. Which part should we pay off?

TM, Yorkshire

You will have to discuss this with your lender. The main issue here is the Miras tax subsidy. From the lender's point of view, do you have two discrete loans? If so, make sure that you pay off the loan without the subsidy.

The other issue is what you want to happen after you have made the lump sum repayment. Say the pounds 20,000 goes against the repayment element of your mortgage and you then carry on making the same monthly payments, you will pay off that part of the mortgage sooner than planned. You may prefer to keep the existing mortgage term and reduce your monthly outgoings. You could ask for the repayment term to last another 13 years to coincide with the endowment part of the loan. Be sure to tell your lender what you want.

Also find out exactly when your lump sum will reduce the interest you are charged. If, for example, interest will continue to be charged on your existing balance until the end of the lender's financial year, you might as well delay making this payment until nearer the end of the financial year.

One other point. Check whether there are any big penalties if you pay off part of your loan early or within the first five years. If there is a penalty, you will have to weigh the pros and cons of paying the penalty or of keeping your pounds 20,000 on deposit and earning interest.

q Write to Steve Lodge, Personal Finance Editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number. Alternatively, fax 0171-293 2096/2098 or e-mail: s.lodge@independent.co.uk. Do not enclose SAEs or any documents that you wish to be returned. We cannot give personal replies or guarantee to answer every letter. We accept no legal responsibility for any advice given.

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Finacial products from our partners
Property search
Money is slipping through our fingers: the UK is falling behind other countries in the amount we put away

How to save money: UK is crashing down the European league table for putting money away

The UK has slipped to 11th in the latest European league table of savers. Rob Griffin checks out the best options

Energy firms found guilty of bad practice could have licences revoked under Labour government

Caroline Flint, the shadow energy secretary, says a Labour government would create a new energy regulator

A student's guide to financial survival: You don't have to drown in debt at university

Fresh from A-level delight, the moment does not have to be soured by students resigning themselves to thousands of pounds worth of debt in three years' time. Rob Griffin sees how to pass the university challenge

'Dismal' eurozone data sparks concerns

European Central Bank chief Mario Draghi is under pressure to launch promised stimulus before the EU slides further
Love but not marriage: property is one area where cohabiting couples are in danger of losing out

How couples can protect their financial interests when cohabiting

People who simply live together cannot assume they have the same rights to each other's assets as spouses or civil partners. Michelle McGagh sees how they can protect their financial interests

India could be jewel in the crown for investors

With a new government and an ambitious prime minister, the country offers the prospect of strong returns. But there may be hiccups ahead, warns Simon Read

Child Maintenance Service to replace Child Support Agency - but is it better?

Reforms to the vexed question of child support payments by absent parents mean extra charges for both sides. Neasa Macerlean reports

Barclays's new life insurance heralds a revolution on the high street

The new product marks a shift towards 'clear, straightforward and standardised' banking products, says Simon Read

How to protect your assets if the stock markets begin to head south again

Are you worried about your portfolio? Nick Paler asks fund managers and investment insiders for advice
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone