Success expected for savings bond: New rates 'will not distort market'

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The Independent Online
SUBSTANTIAL demand is predicted for the new First Option Bond that National Savings will launch next week.

When it was first launched last year the First Option Bond was so successful it had to be withdrawn after the building societies threatened to put up their mortgage rates in response. It is possible that the building societies will again find the Bond too aggressive as a rival. 'It is a threat,' said Tim Melville-Ross, Nationwide's chief executive. 'We're marginally more relaxed over National Savings than we were last August.'

Stephen Dorrell, Financial Secretary to the Treasury, said this week, however, that National Savings rates would not distort the savings market.

The First Option Bond will now offer a 6.34 per cent gross return (4.75 per cent net) on pounds 1,000 minimum investments held for a year. Hardly any of the insurance companies offer a one-year guaranteed income bond (GIB) with a pounds 1,000 minimum. One of the best small GIBs in the business is the pounds 2,000 minimum Consolidated Life bond, which offers a return of 4.75 per cent to non-taxpayers and 25 per cent to taxpayers.

GIB specialists Baronworth Investment Services believe that the new National Savings bond will have a large market. 'Any independent financial adviser worth his salt would say to a client that if they are a non-taxpayer with pounds 1,000 to invest, they should go for a First Option Bond,' said director Colin Jackson.

GIBs and First Option Bonds are both paid net of basic-rate tax. The tax is recoverable on a First Option Bond but not on a GIB.

On a direct comparison of net rates, First Option Bonds are the market leaders on one-year investments for deposits of up to pounds 50,000. A gross bonus of 0.4 per cent (net of 0.3 per cent) is offered on deposits of more than pounds 20,000 - producing a net rate of 5.05 per cent.

Consolidated Life offers a net rate of 5.0 per cent for GIB investments between pounds 20,000 and pounds 50,000 and a net rate of 5.2 per cent for pounds 50,000-plus.

First Option Bond prospectuses and application forms will be available from post offices from 29 March.

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