From spring 2017, you'll be able to save in a new account from Government-backed savings provider NS&I. It'll pay an expected 2.2% interest on up to £3,000 for a three-year fixed term, as announced by Chancellor Philip Hammond in November's Autumn Statement.
In a world of paltry savings returns, the Investment Guaranteed Growth Bond account would trump today's standard best-buys at that rate. But it doesn't set the world alight, and could be beaten by the top bank savings rates. We've a brief overview of how it'll work with what we know now – we'll update the article as we learn more.
In this guide...
The Investment Bond need-to-knows
Anyone 16+ can save up to £3,000, and interest's likely to be 2.2%
The Investment Bond will be open to anyone aged 16 or over when it launches in spring 2017 – there are no other restrictions on who can open one.
Here's what we know so far:
- You'll be able to open one account per person and save between £100 and £3,000 in it in total.
- You can keep adding to the account through the full three-year term until you hit the maximum £3,000. But the sooner you get your money in, the more time it has to earn interest.
- You can open a joint account with someone who's 16+, up to a max £6,000. If you've opened a joint one, you can't also open an individual account, and vice versa.
- It'll be offered through NS&I, the Government's savings provider.
- You'll need to open the bond online – there's no phone or postal option.
- It'll be launched at some point from 6 April 2017 – when the next tax year starts – though the date has yet to be announced. You'll have until spring 2018 to open one.
We asked the Treasury if this is a one-off, or if there'll be another bond launched in 2018. It told us that while there are currently no plans to offer anything more than this one, it won't rule anything out, and will review whether to offer another nearer the time.
Despite the name, it's a SAVINGS account with no risk, not an investment account
It's an odd name – as you're not actually investing anything. With investments, you normally take some risk, such as buying shares where the value can go up or down. But, in this bond, you're just saving and getting interest on those savings.
Plus, the term 'bond' makes this sound more complex than it is – bonds can be many things. However, in this case all the name means is that it's a fixed-rate savings account, so you get a guaranteed rate for a set time and your cash is locked away.
Its rate smashes other fixed savings, but bank accounts may beat it
The Government has indicated that the Investment Bond will have a 2.2% interest rate, though this is subject to change if market interest rates change significantly.
If the rate is 2.2%, you'll be able to get a maximum £66 a year interest, or £202 over the three-year bond term, assuming interest compounds (ie, you earn interest on the interest). Interest will be paid annually – so the bond can't be used as monthly income – though monthly interest would only be a maximum £5.50 anyway.
To compare against standard savings, today's best-buy three-year bond from a UK-protected bank is from Tesco Bank and offers 1.62% AER. So, on £3,000 that would give £48 interest a year, or £148 over the three-year term. It's less than you'd get with the Investment Bond, but the Tesco Bank account lets you save between £2,000 and £5 million; so it gives less interest, but on a larger amount.
The other thing to check is whether you can get a higher rate in a high-interest bank account. These accounts have variable interest rates, but there are accounts that'll let you save £3,000 at 3% interest – and they're easy access so you don't have to lock the cash away. Assuming these rates don't drop over three years (though in the current interest rate environment, that's unlikely), you'd get £90 interest a year, or £278 over three years, absolutely smashing the Investment Bond.
We don't yet know what other fixed savings will look like when the Investment Bond launches in spring 2017, but we'll do a full comparison in this guide at the time.
Martin Lewis: 'It's welcome but people won't be whooping'
This new NS&I bond wasn't the Chancellor's rabbit out of a hat, it was more of a mouse.
Over three years it's a max £66 in interest a year, ignoring any compound interest. It's an improvement on the current best-paying three-year fixed deal on the market. But actually, in the private market at the moment, it's only a marginal improvement.
Certainly any account that beats the paltry rates of interest that we have currently is to be welcomed, but I don't see many people whooping.
You can access the money early for a small penalty so 'locking it away' for three years becomes less risky
The account's designed to hold your money in for three years. The risk of keeping it holed up in one place for so long is as follows:
- Inflation could eat into returns. With inflation rising, and forecast to hit 2.7% in 2017, an account earning you 2.2% would actually be eroding the value of your money. But, if it remains the highest-interest savings account out there, and you're happy sticking to cash savings, it'll be one of the better ways to protect your cash from inflation.
- Interest rate rises could mean the account's no longer any good. While rises appear a way off, in such a volatile economic climate, no one knows what'll happen.
But, the fee for early access isn't too severe. You'll be able to access your money for a penalty equivalent to 90 days' interest. On the maximum £3,000 investment withdrawn after a year, you'd sacrifice just over £16 of your total £66 interest. So that'd be the cost to move it to a better-paying account, if one came up.
Most people won't pay tax on the interest
In the past, NS&I has had several tax-free accounts, such as its inflation-linked savings, or premium bonds. But, the Investment Bond, like last year's Pensioner Bonds, will be taxable.
However, interest from the Investment Bond will be paid gross (ie, without tax taken off) as with other savings. For most, the interest will be covered by your personal savings allowance.
Under the allowance, basic-rate taxpayers can earn £1,000 in savings interest without paying tax on it and higher-rate taxpayers £500 (additional-rate taxpayers don't get an allowance). That means if you'll earn less interest in total than your allowance (including Investment Bond interest), you won't pay tax on it.
If interest from the Investment Bond combined with that from other savings takes you over your personal savings allowance, HMRC will collect any tax you owe through PAYE or self-assessment.
Your savings are safe in the Investment Bond
This bond is operated by NS&I, which rather than being a bank, is backed by the Treasury. This means you get 100% safety for your cash (well, unless the UK itself went bust, in which case we've all got bigger problems). Read the full Are Your Savings Safe? guide.
Like Pensioner Bonds, the Investment Bond is a sop to hard-hit savers
Like 2015's Pensioner Bonds, the launch of the Government's Investment Bond is its way of trying to give something back to savers hit by more than eight years of base rate cuts. Unlike Pensioner Bonds, though, the Investment Bond is open to anyone aged 16 or over – meaning the Government's now giving something back to anyone of almost any age who's been hit by spitworthily low rates.