The forgotten man of tax-efficient savings

National Savings cannot match the advertising budgets of banks, building societies and fund managers

In recent years National Savings has been the forgotten man of tax-efficient investing. More glamorous tax-free savings such as ISAs have stolen the glory.

In recent years National Savings has been the forgotten man of tax-efficient investing. More glamorous tax-free savings such as ISAs have stolen the glory.

This will only intensify over the next few months, as banks, building societies and fund managers unleash their advertising budgets in a bid to get our cash before this year's April 5 ISA deadline.

There is no way dear old National Savings can match this kind of spend but lack of marketing millions is not the only reason why National Savings' products have slipped down the investment agenda. Lacklustre returns over the last 18 months have sent investors looking elsewhere.

But some investment experts predict that we may soon see National Savings creeping out of the shadows. "We used to routinely include them as part of our portfolio planning," says Justin Modray, investment adviser with Chase de Vere. "But 18 months ago their margins became much less competitive and we started to look elsewhere. Now they have improved and are starting to look more attractive once more."

National Savings announced interest rate rises on various products six times in the second half of 1999. December saw rises of up to 0.5 per cent on some products, although others increased by just 0.1 per cent.

"The problem is that National Savings is handcuffed when it comes to offering high rates, because it has to offer realistic returns across all products," says Mr Modray.

National Savings products appeal to investors looking for a safe, steady return from their money. "They are a good, long-term home for investors who want to put their money away and not have to worry about it."

Current rates may not look spectacular but they offer several advantages that may not be available with more flashy savings. Its two-year Index-linked Savings Certificates now pays 3 per cent above the Retail Price Index, while its two-year Pensioners Bonds currently pay 5.9 per cent gross (see table). Its six-month Fixed Rate Savings Bonds pay between 5.55 per cent gross for investments of more than £500, rising to 5.75 per cent if you invest more than £20,000.

Jim McLatchie, associate director with independent financial advisers Aitchison and Colegrave, says the two-year Index-linked Savings Certificates is particularly attractive for higher-rate taxpayers because all returns are free of income tax and capital gains tax. "Higher-rate taxpayers will get 3 per cent above inflation, but this is equivalent to more than 7 per cent gross. It is secure and investors can get their money out at six working days' notice but you can only invest a maximum of £10,000."

Premium Bonds are another tax-free vehicle, currently offering a prize fund rate of 3.5 per cent. The odds of winning a price are 22,000 to 1 each month for each £1 bond you own. There is also the enticement of a £1 million jackpot but your return may be nil.

Older investors are attracted by the security offered by a government-backed savings product. "Most pensioners like the certainty of knowing they have a set amount of income. A lot had their fingers burned in the past going for high interest rates. Now many are seeking fixed-rate investments such as Pensioners Bonds," says McLatchie.

Despite the recent rate increases, National Savings still leave some investment experts cold. Chislehurst-based independent financial adviser Brian Dennehy says: "We used to regularly recommend index-linked certificates when the margin over inflation was reasonable and there was a risk that inflation would shoot up."

But he added: 'With inflation likely to continue at its current low rate, the certificates look less attractive." He still uses Premium Bonds where investors want to add variety to a large portfolio. A number of National Savings products, including its Capital Bonds, Pensioners Bonds, Income Bonds and Investment Account, are taxable, but pay interest gross, which must be included in your tax returns. These are often suitable for non-taxpaying investors. However, for most investors wanting secure returns he prefers to recommend taking guaranteed income bonds offered by banks and building societies. "You can now get returns of 6 per cent a year net of basic rate tax."

The tax benefits offered by National Savings should not be forgotten. When considering tax-efficient investing, first use your tax-free ISA allowance, which offers a far wider investment choice and gives you access to the potentially higher returns of the stock market. Then consider taking National Savings.

For further information call National Savings on: 0645 645000 or try

www.nationalsavings.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
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

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Guru Careers: Graduate Editor / Editorial Assistant

    £16 - 20k: Guru Careers: A Graduate Editor / Editorial Assistant is needed to ...

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Day In a Page

    Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

    Please save my husband

    As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada
    Birthplace of Arab Spring in turmoil as angry Tunisians stage massive sit-in over lack of development

    They shall not be moved: jobless protesters bring Tunisia to a halt

    A former North African boom town is wasting away while its unemployed citizens stick steadfastly to their sit-in
    David Hasselhoff's new show 'Hoff the Record': What's it like working with a superstar?

    Hanging with the Hoff

    Working with David Hasselhoff on his new TV series was an education for Ella Smith
    Can Dubai's Design District 'hipster village' attract the right type of goatee-wearing individualist?

    Hipsters of Arabia

    Can Dubai’s ‘creative village’ attract the right type of goatee-wearing individualist?
    The cult of Roger Federer: What is it that inspires such obsessive devotion?

    The cult of Roger Federer

    What is it that inspires such obsessive devotion?
    Kuala Lumpur's street food: Not a 'scene', more a way of life

    Malaysian munchies

    With new flights, the amazing street food of Kuala Lumpur just got more accessible
    10 best festival beauty

    Mud guards: 10 best festival beauty

    Whether you're off to the Isle of Wight, Glastonbury or a local music event, we've found the products to help you
    Unai Emery’s passion for winning and eye for a bargain keep Seville centre stage in Europe

    A Different League

    Unai Emery’s passion for winning and eye for a bargain keep Seville centre stage in Europe, says Pete Jenson
    Amir Khan and James DeGale’s remarkable Olympic performances were just the start of an extraordinary journey - Steve Bunce

    Steve Bunce on Boxing

    Amir Khan and James DeGale’s remarkable Olympic performances were just the start of an extraordinary journey
    Abuse - and the hell that came afterwards

    Abuse - and the hell that follows

    James Rhodes on the extraordinary legal battle to publish his memoir
    Why we need a 'tranquility map' of England, according to campaigners

    It's oh so quiet!

    The case for a 'tranquility map' of England
    'Timeless fashion': It may be a paradox, but the industry loves it

    'Timeless fashion'

    It may be a paradox, but the industry loves it
    If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

    Could have done with Osama bin Laden staying alive?

    Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
    New exhibition celebrates the evolution of swimwear

    Evolution of swimwear

    From bathing dresses in the twenties to modern bikinis
    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf