Make a truly safe deposit

National Savings can now offer small investors better returns than in days gone by ... and there's still no risk whatsoever NATIONAL Savings has launched a now stock market-linked equity bond, signalling a major departure from its tradition of offering ultra- low-risk, government-backed, investments for small savers.

It will allow punters who wish to invest in today's volatile equity markets to do so, safe in the knowledge that they will not lose their original investment.

If the FT index of Britain's 100 biggest companies falls over the five-year life of the bond, you can have your money back. However, if markets rise, the most you can benefit is from a 65% return. Up to that level you can enjoy 100% of the rise in the Footsie, but nothing beyond that cap. So for example, if the index lurches up by 90%, you still get only a 65% return.

Guaranteed bonds of this nature are always popular in times of economic uncertainty. Investors believe that the markets will recover and want a share of that action. But they are also keen to limit the downside risk that share prices could slide even further.

The one major disadvantage is that any gain comes from the rise in share prices. Investors do not enjoy any of the dividends paid out by the stocks.

Right now suppressed prices but healthy dividends in some sectors should be a primary motive for investing.

Similar bonds are offered by Britannia, Norwich Union; Wesleyan Savings, West Bromwich Building Society, Birmingham Midshires, Bristol & West, GE Life, More Than, Northern Rock and Standard Life. But it represents something of a departure for National Savings, which was launched by William Ewart Gladstone, when he was Chancellor of the Exchequer in 1859, to encourage ordinary people to put money away for a rainy day.

The first tax-free savings certificates appeared during the First World War to raise fighting funds. War savings committees and associations were set up and five million people invested (pounds) 217 million in all.

By the second world war there were 41,000 national savings associations, which again swung into action to fund the conflict. By the end of the war there were 20m accounts holding (pounds) 1.7 billion, compared to just (pounds) 551m at the outset.

Today National Savings is headquartered in London, with operations in Glasgow, Blackpool and Durham.

The Children's Bonus bonds, fixed-rate savings bonds, capital bonds, investment accounts and ordinary accounts are run from Glasgow.

Of late National Savings products have not necessarily proved particularly attractive, partly because the government has not needed to raise substantial funds to pay for its manifesto promises. At the same time, high-street savings rates have been attractive as institutions have battled for customers.

But National Savings should not be ignored, as their products can prove attractive for certain investors. Taxfree savings certificates can prove popular, particularly for higher-rate taxpayers who have already used up their other tax-free options, such as Individual Savings Accounts (Isas).

The best Isa rates on the high street right now hover around 4% (see Best Buy tables), which would be worth 2.4% to a higher rate taxpayer. Savings certificates, however, will pay 2.55% fixed for two years, or 2.9% over five years. The minimum investment is (pounds) 100 and the maximum holding is (pounds) 10,000.

Similarly, National Savings's own cash mini-Isa will pay 4.15%, which isthere or thereabouts with most of the other big payers.

If Inflation is your worry, then you can guarantee to protect the value of your savings with index-linked certificates which pay 1.15% above the retail price index over two years or 1.3% over five.

Children can also enjoy tax-free returns with Children's Bonus Bonds, which pay 3.65% if held for five years. These are bought in (pounds) 24 lots up to a maximum of (pounds) 1000. However, few children pay tax anyway, as the benefit from the same personal tax allowance as adults, and better rates are availablefrom other savings institutions.

Investments within the rest of the National Savings stable are taxable. The Fixed Rate Savings Bonds, for example, pay between 3% and 4.05% depending on whether you lock in for one, three or five years. But returns are paid after 20% tax has been deducted, bringing the best net return down to 3.24%.

Capital Bonds peg returns at 3.9% for five years. Income is paid in full without the deduction of tax at source, which can be convenient for non-taxpayers. Minimum purchase is (pounds) 100, but investments can go up to (pounds) 250,000.

Pensioners' bonds are always popular. Again these are taxable, but paid in full without any tax being deducted. You can fix your rate at 3.25% for one year, 3.45% for two years or 3.9% for three years.

However, this compares with a one-year e-bond at Abbey National paying 4.1%, a two-year offering from the Halifax paying 4.25% and a three-year deal from the National Counties Building Society, paying 4.55%.

Finally on the investment front, income bonds paying a monthly income will return 3.55% under (pounds) 25,000, or 3.8% for holdings larger than that.

The two National Savings savings' accounts have little to recommend them, so if you have money stashed away in those, it might be time to think about making a move.

Worst of all is the Ordinary Account, which most of us think of as our Post Office accounts. You can make instant withdrawals of up to (pounds) 100 over the counter, but it pays a miserable 0.5% interest. The Investment Account is slightly better, with interest starting at 2.6%, but it is still highly uncompetitive when compared with an attractive bank or building society rate. Furthermore, you must give a month's notice of withdrawals or lose interest payable.

Finally, Premium Bonds allow you to take part in the monthly Ernie draw, with the prospect of picking up a (pounds) 1m prize. But the odds of doing so run to seven billion to one. So just how lucky do you feel?

Copyright 2002 SMG Sunday Newspapers Ltd.
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