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