Bonds are essentially IOUs – you give a company, bank or government your money for a set period and you will get it back with a pre-determined interest rate once the agreed period of investment ends.
There are number of ways you can save in bonds. Check out MMM’s guide below on how you can invest in bonds.
National Savings & Investments – premium bonds
Premium bonds, provided by National Savings & Investments (NS&I), do not pay interest, but every month there’s a chance to win a £1 million jackpot, plus other cash prizes which are tax free. You never know, you could get lucky – this year, a female from Leeds who holds only £400 in premium bonds, won the £1 million jackpot!
Premium bonds is one of the most popular bonds with savers, with almost half of UK savers putting their money into them.
NS&I is backed by the government, so your money is pretty safe here.
The minimum investment is £100 and the maximum is £40,000, which will go up to £50,000 in 2015, as announced in the 2014 Budget.
The more you save, the greater your chances of winning are.
The prizes are tax-free, which you can re-invest if you want. The winners are selected in a random prize draw.
According to NS&I, the odds per £1 unit of winning are 24,000 to 1. There are no penalties if you decide to withdraw the cash.
Anyone over age 16 can buy premium bonds.
If you do decide to take out a premium bond, make sure you check the NS&I website regularly to see the list of winners – a shocking £39 million worth of prizes are currently unclaimed.
There is no time limit by which you must claim your prize.
Premium bonds cannot be passed on, so use them or cash them in – do not forget about them. You can easily manage your premium bonds online.
You can buy premium bonds directly from NS&I here.
Buying bonds for children
NS&I bonds can be bought as a gift for children by parents, guardians, grandparents or great grandparents. They have become increasingly attractive because of the guaranteed returns and tax-free earnings associated with them.
NS&I will pay a guaranteed interest rate for five years – which currently stands at 2.5%. The savings are also tax free – you pay no UK income tax or capital gains tax on any of the returns.
The bonds can only be bought in units of £25, so the minimum investment is £25. The maximum is £3,000.
You are expected to invest for at least five years – there is a penalty for cashing in early. The penalty is equivalent of 90 days’ interest of the amount you cash in within the first year then you will not get any interest.
A nominated parent or guardian must look after the bond until the child is age 16. This person has to be nominated at the time of application.
Buying bonds for children are a great option if you think you will not need the cash for at least five years. If you are likely to need the money before that, then it’s probably worth considering other options.
Interest rates for savings are currently really low, so 2% is not bad, but remember, you have to invest for a full five years to get the full return, otherwise you will have to pay the penalty.
If you want to buy bonds for children, you can apply online at NS&I or on phone calling 0500 500 000.
The bonds can be opened by parents and guardian.s Grandparents and great grandparents can open one too, but they have to do it by post.
NS&I income bonds
NS&I income bonds allow you to save with a little more flexibility and pays you interest monthly, straight into your bank account.
Interest rates are however variable and tiered, so the more you invest, the higher the interest rate.
If you invest between £500 – £25,000 then the interest rate is 1.26% AER – this is before tax.
There is no penalty if you decide to take the cash out at any time.
Although you get the reassurance that your savings are backed by the government and your money is safe, interest rates are not attractive and you will be paying tax on the interest.
If you want to apply for NS&I income bonds, click here.
You may decide you do not want to invest with the government and opt for corporate bonds.
Corporate bonds allow you invest with companies. Companies issue them as a way to raise cash.
Corporate bonds can be purchased via a stockbroker, financial advisor, or an investment bank. You will be subject to fees.
You can invest in companies individually or as part of a fund.
Last year, the London Stock Exchange launched the Order Book for Retail Bonds which allows consumers to access corporate and government bonds with individual companies.
They are traded through London Stock Exchange member brokers and corporate bonds are available from as little as £100, but government bonds can go for as little as £1, offering an affordable entry point for consumers.
What you should know:
*If you invest in a corporate bond, then remember, if the companies you invest with go bust then you could lose your savings.
*Some saving accounts use the term bond for fixed-term contracts. Corporate bonds are not the same thing and do not benefit from the £85,000 investment protection offered by banks under the Financial Services Compensation Scheme.