Want a safe option? Lend to the Treasury

The attraction of National Savings is the very fact that they are so dependable. But cast-iron security comes at a price

National Savings are like support tights. You can be sure the various accounts will do their job, but most people would be reluctant to admit to owning them.

National Savings are like support tights. You can be sure the various accounts will do their job, but most people would be reluctant to admit to owning them.

The attraction of National Savings - the government-run savings scheme - for more cautious savers at least, is the very fact that they are so dependable. You are lending to the Treasury so your money is about as safe as it can be from misfortunes such as commercial collapse or individual fraud. But cast-iron security comes at a price - namely, that you are unlikely to earn headline rates of interest on it.

For the 30 million UK residents holding some kind of NS product that's an acceptable trade-off. And even if you're not particularly averse to risk, the tax-free NS products are well worth looking at, for higher-rate taxpayers in particular.

National Savings are players in the most obvious tax-free arena - that of cash mini ISAs and Tessa-only ISAs. It's a fiercely competitive field, though, and the NS ISAs are not table-toppers.

Indeed, at present they are not even able to compete under the same rules as commercially run ISAs: the Budget announcement that cash ISA limits are to be retained at £3,000 for the new tax year which started on 6 April (instead of being cut to just £1,000) cannot be implemented by NS until Parliament has approved the changes to the NS regulations. So until 27 May it's possible to deposit a maximum of £1000 in a NS cash ISA, which can be topped up to £3,000 after that date. If you want to save the full lump sum before then, you'll have to turn elsewhere.

That's no great loss, though. The current NS rate for cash mini ISAs and Tessa ISAs is 6.25 per cent, with instant access and a minimum deposit of £1 - roughly comparable with many other ISA rates, and better than some. But you could earn 7.25 per cent on a cash mini ISA at internet bank Smile, or 7.05 per cent from the Coventry Building Society. Both offer the same (CAT-standard) terms.

However, NS comes up trumps with tax-free opportunities in addition to the ISA allowance. There are several choices, including fixed interest and index-linked savings certificates, children's bonus bonds and premium bonds.

Savings Certificates vary in terms of the length of time they are held and what type of rate is offered; each variation is available as a separate "issue", paying a different interest rate. You can hold up to £10,000 in each issue, regardless of the tax year. Savings Certificates may be either two or five year investments, and either fixed rate or index-linked. Which you choose will depend on your view of what inflation's likely to do - if you think it's going to rise, then you should choose one of the index-linked issues which pay a variable rate to reflect inflation plus a low fixed additional rate.

The 3rd issue, which runs for two years, is paying 3.15 per cent plus inflation (2.3 per cent as of February 2000). The 17th issue (the five-year version) pays 2 per cent plus inflation. The two year fixed-rate version is paying 4.75 per cent and the five year fix pays 4.5 per cent.

Although these don't sound particularly spectacular beside the ISA rates available, they are markedly better than the standard taxable deposit account rates - which range between 6.25 and 7.05 per cent - especially for higher rate taxpayers who would pay 40 per cent on taxable savings. The most attractive package is the two year fix at 4.75 per cent, which equates to a hefty 7.9 per cent gross of tax at 40 per cent.

The index-linked 3rd issue is also competitive: 3.15 per cent tax free amounts to 3.94 per cent gross for basic rate taxpayers and 5.25 per cent for higher rate taxpayers. If you add on the 2.3 per cent index-linking then you're looking at the equivalent of 6.24 per cent at basic rate or 7.55 per cent at the higher rate.

Children's bonus bonds are worth considering if you want to build up a nest egg for the next generation. Unlike other investments they carry no tax liability for parents channelling money to their children. Moreover, even in the event that the children grow up, start earning and become taxpayers before they cash in their bonds, they won't be saddled with tax to pay.

Again, they run in issues, with a maximum investment of £1,000 per issue which is available in £25 units. A fixed interest rate (currently 3.5 per cent) is paid for five years, with a bonus (currently 12.84 per cent) on the fifth anniversary.

That averages out at 5.65 per cent if the bond is held for the full five year term. And it's possible, until the child reaches the age of 21, to roll the bond over into the current issue on maturity.

Premium bonds are a source of potential millionaire status for more than 23 million bond-holders in the UK. And Ernie the computer's tax-free monthly draw has been made rather more alluring in the last few weeks, with an increase in the monthly sum to be distributed - up from 3.75 per cent of the total pot to 4 per cent in May and 4.25 per cent in June. There will be more higher value prizes and almost double the number of £100 prizes to be won in June compared with May.

Do premium bonds count as "proper" investments, rather than a less glamorous version of the National Lottery?

Unlike the lottery, there's no risk to your capital - you can cash in a premium bond at any time. And with the odds of winning a prize in any one month at 20,000 to one as of June, a maximum investment of £20,000 would on average win 12 prizes a year, mostly worth £50 or £100. The likelihood of netting the £1 million jackpot, however, would remain slim ata 680,000 to one chance of the Big One.

They are not the investments for anyone looking for capital growth they can count on; but if you have more spare cash to tie up and are game for a gamble, there's interesting potential to rake in a decent sum of money.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
people
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
filmDirector said film would 'never have been financed' with ethnic minority actors in key roles
News
people
Sport
footballArsenal 2 Borussia Dortmund 0: And they can still top the group
PROMOTED VIDEO
Arts and Entertainment
An unseen image of Kurt Cobain at home featured in the film 'Kurt Cobain: Montage of Heck'
film
News
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
Arts and Entertainment
Jake Quickenden and Edwina Currie are joining the I'm A Celebrity...Get Me Out Of Here! camp
tv
Arts and Entertainment
George Mpanga has been shortlisted for the Critics’ Choice prize
music
News
Albert Camus (left) and Jean-Paul Sartre fell out in 1952 and did not speak again before Camus’s death
people
Arts and Entertainment
Roisin, James and Sanjay in the boardroom
tvReview: This week's failing project manager had to go
News
Ed Miliband visiting the Holocaust museum in Jerusalem. The Labour leader has spoken more openly of his heritage recently
newsAttacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But are the barbs more sinister?
Arts and Entertainment
'Felfie' (2014) by Alison Jackson
photographyNew exhibition shows how female creatives are changing the way women are portrayed in advertising
News
i100
Life and Style
Fright night: the board game dates back to at least 1890
life
Environment
The vaquita is being killed by fishermen trying to catch the totoaba fish, which is prized in China
environmentJust 97 of the 'world's cutest' sea mammals remain
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 Consultants

    £20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

    Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

    £16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

    h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

    £35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

    Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

    £Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

    Day In a Page

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
    There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

    In pictures: There's a Good Girl exhibition

    The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
    UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

    UK firm Biscuiteers is giving cookies a makeover

    It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
    Can SkySaga capture the Minecraft magic?

    Can SkySaga capture the Minecraft magic?

    It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
    The King's School is way ahead of the pack when it comes to using the latest classroom technology

    Staying connected: The King's School

    The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
    Christmas 2014: 23 best women's perfumes

    Festively fragrant: the best women's perfumes

    Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
    Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

    Arsenal vs Borussia Dortmund

    The Ox celebrates century with trademark display of speed and intuition
    Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

    When two worlds collide

    Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
    Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

    Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

    Our partner charities help veterans on the brink – and get them back on their feet
    Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

    Putin’s far-right ambition

    Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
    Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

    Escape to Moominland

    What was the inspiration for Finland's most famous family?