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The Independent Online
IT MAY be loved by grannies up and down the country, but in recent years National Savings hasn't been able to offer market-leading rates. What it does offer is stability and safety; it was established 137 years ago to allow the government to borrow money from savers.

National Savings holds pounds 63bn, making it the second-largest savings institution behind the Halifax. It offers a number of deposit-based savings plans, ranging from basic accounts to bonds. But most taxable National Savings plans are uncompetitive and its Ordinary Account pays less interest gross than the net rates offered by most high-street savings accounts. The First Option Bond and Capital Bond no longer offer competitive returns. So are National Savings products worth it?

"If you think inflation will rise, an Index-linked Savings Certificate may be worth including in your portfolio," says Rebekah Kearey, an independent financial adviser (IFA) at Roundhill Financial Management in Brighton."But I haven't been using National Savings products recently because much higher interest rates can be found elsewhere."

Francis Klonowski, an IFA with Leeds-based Klonowski & Co, says: "Some National Savings plans are definitely worth considering as part of a portfolio. And once you start saving, interest rates are guaranteed on some products. These rates may not be as high as some of the new savings accounts, but I'm always suspicious of high rates that are designed to tempt people in."

Savings Certificates offering guaranteed, tax-free returns for five years are attractive to higher-rate taxpayers and investors who have used up their full PEP and Tessa allowances. And with further falls in interest rates expected this month, they look even more attractive.

Savings Certificates

Features: five-year, fixed-interest investments. Rates are fixed at the time of purchase. If you cash in before the end of the term you will get a reduced rate of interest. If you cash in within 12 months you won't get any interest at all.

Minimum/maximum investment: pounds 100 min/pounds 10,000 max.

Interest: compound interest averaging 4 per cent a year is added on to the value of your certificate, which you get at maturity. This is equivalent to 5 per cent a year gross for basic-rate taxpayers and 6.66 per cent for higher-rate taxpayers

Tax: the interest is free of tax.

Suitable for: these are suitable as long-term savings and are particularly attractive to higher-rate taxpayers. A good investment for Tessa holders who want to earn further tax-free interest.

Index-linked Savings Certificates

Features: they guarantee that the buying power of the money you invest will keep pace with rising prices. They are five-year investments.

Min/max investment: pounds 100/pounds 10,000.

Interest: fixed at 2 per cent above inflation.

Tax: the interest is free of tax.

Suitable for: most investors when the rate of inflation looks set to rise. More suitable for higher-rate taxpayers than non-taxpayers.

Ordinary Accounts

Features: instant access deposit accounts.

Min/max investment: pounds 10/pounds 10,000.

Interest: interest is a low 2 per cent gross on balances up to pounds 500 and 3 per cent gross on balances over pounds 500.

Tax: interest is tax-free for everyone only up to the first pounds 70 a year.

Suitable for: anyone who doesn't have a bank account. However, accounts from banks, building societies and insurance banks are currently paying far higher rates of interest.

Investment Accounts

Features: notice deposit accounts. You can withdraw money without giving notice but you lose 30 days' interest.

Min/max investment: pounds 20/pounds 100,000.

Interest: interest is tiered from 5 per cent gross on balances less than pounds 500 up to 6.75 per cent gross on balances over pounds 50,000.

Tax: interest is paid gross, but is liable to tax and must be declared.

Suitable for: non-taxpayers who do not want instant access to their funds and who want to make irregular savings. But high-street bank and building society notice accounts and some instant access accounts are currently paying higher rates.

Income Bonds

Features: regular monthly interest at a variable rate. You must give 90 days' notice of any withdrawals or you will lose 90 days' interest.

Min/max investment: Minimum first purchase pounds 2,000 and the minimum for each subsequent purchase is pounds 1,000. Maximum holding of pounds 250,000.

Interest: currently 7.25 per cent gross on balances less than pounds 25,000 and 7.5 per cent gross on balances of more than pounds 25,000. Rates change on 27 November to 7 per cent gross and 7.25 per cent gross.

Tax: interest is taxable, but paid gross.

Suitable for: non-taxpayers who want a regular income. Bonds can be held jointly or in trust.

Capital Bonds

Features: five-year investments. Interest is fixed at the time of purchase. If you withdraw money in the first year, no interest is payable.

Min/max investment: pounds 100/pounds 250,000.

Interest: 5 per cent gross per year. If you cash in the bond early, you will get a lower rate.

Tax: interest is taxable, but paid gross.

Suitable for: non-taxpayers who don't want income from their savings. They are only worth considering if you are prepared to tie your money up for five years.

First Option Bonds

Features: one-year, fixed-rate bonds which carry the option to re-invest in a new bond at a new fixed rate when your bond reaches maturity. If you withdraw during the first 12 months you will get no interest. After 12 months you can withdraw at any time, but will get the value at the most recent anniversary plus half the fixed rate of interest for the period since then.

Min/max investment: pounds 1,000/ pounds 250,000.

Interest: 6.25 per cent gross, rising to 6.50 per cent gross on a bond of pounds 20,000 plus.

Tax: deducted at 20 per cent before interest is paid.

Suitable for: poor return for higher-rate taxpayers and you can get one-year fixed-rate bonds paying higher rates from the high street.

Children's Bonus Bonds

Features: long-term fixed-rate investments for children. Bonds are taken out for five-year terms but can be re-invested for further periods. They may be bought for any child under the age of 16 and can be held to a maximum age of 21.

Min/max investment: pounds 25/pounds 1,000.

Interest: 5 per cent guaranteed for five years and paid free of tax.

Tax: children who become taxpayers before their bonds mature will have to pay any tax on the proceeds.

Suitable for: parents or relatives who want to put aside money for their children. There are no alternative tax-free investments for children, but there are plenty of high- street accounts that pay higher interest than 5 per cent.

Pensioners' Guaranteed Income Bonds

Features: a guaranteed monthly income for savers aged 60 and over. Interest is fixed for five years at the date of purchase and is paid monthly. You can withdraw money, but if you do not give notice you lose 90 days' interest.

Min/max investment: pounds 500 minimum, pounds 50,000 maximum per series (pounds 100,000 for joint holdings).

Interest: 5 per cent gross, paid monthly.

Tax: interest is paid gross, but is liable to tax.

Suitable for: bonds can be held jointly and are suitable for retired people who want a fixed level of monthly income and do not need access to their capital. Higher rates are available from high-street bank and building society monthly income accounts

Premium Bonds

Features: offer the chance of winning a monthly prize, but no interest is paid to investors. The total value of the prize money is equal to interest on all bonds that have been held for at least one month, calculated at a rate of 5 per cent a year. Once you have held a bond for one clear month, it has a chance of winning prizes from pounds 50 to pounds 1m.

Min/max investment: pounds 100/pounds 20,000.

Tax: none.

Suitable for: anyone who wants a flutter without risking their stake. Your return is determined by chance; if you don't win, your money will lose its value because of inflation.

For more details of National Savings, go to your local post office or call 0645 715401. The website on www.nationalsavings.co.uk has full details of products, latest interest rates and news. If you key in your financial circumstances, it will suggest the products most suitable for you.

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