There are many ways in which people manage the money they have saved for various purposes. Making investments is arguably one of the best ways to achieve this goal. If it’s done right, your savings should increase at a faster rate than ever before. However, you also need to be very careful at every step as you may end up losing a lot of money otherwise. This occurs because you might find this matter to be quite a complicated one.
Among other types of investments, you might be wondering whether you should buy savings bonds. In such cases, you shouldn’t get into it before you’re completely sure about it. For that, you need to know about how they work apart from some other information, this will help you to make a decision.
How does it work?
If you’re new, you must first know how the system of bonds works. If it seems a little complex to you, you must simply see it the same way as the system of borrowing and lending. Further, it is used by the government as well as private institutions to increase their fund.
In this case, you are the lender and the organization you give money to is a borrower. They offer to pay you a certain rate of interest on the amount you deposit with them. Suppose, in the case of other borrower-lender relations, this arrangement would last for a fixed period. It must be noted that you won’t be able to withdraw your money whenever you want.
You can do that only after you’ve crossed the time that was agreed upon. Then, you can take out the interest that you earned, along with the principal amount that you lent them.
Now, if you’re wondering what savings bonds are, they are simply the ones that are sold by a bank.
Other than this, there are no major differences in the way it works, as compared to other types. You can also buy them from your building societies if you want, as they sell them too. It is worth mentioning that you have to deposit a certain amount. The minimum amount you can deposit differs from one organization to another.
How are they any different from a savings account?
After you come to know about how they work, you might wonder how they are different from savings accounts. In that case, there are some reasons why people choose to buy them. The important one is that you can earn a higher interest from savings bonds as compared to any bank account.
However, the rate is not always fixed. In tracker bonds, they may keep rising and falling throughout the period.
By what means can you buy one?
Savings bonds are sold directly to the customers by banks and building societies. That makes them easier to acquire as compared to those sold by other organizations. Because in those cases, you have to find a stockbroker and make the purchase through them. You can’t simply buy them directly.
Would they be a good option for you?
Before you buy a savings bond, you must consider many things to be able to take the right decision. You will have to carefully measure the benefits that you get against the risks that you face. Like other arrangements, this one too features both of those elements.
Needless to say, you should go for it only if it offers more benefits. It must be pointed out that when it comes to the level of risk, it is medium in this case. So, you must go to the largest amount of interest that you can get. This would be compensation for the risks you’re taking.
If you don’t find the offer to be favourable in your case, it would be better to invest your money somewhere better. Also, you generally need to deposit at least £500 into a savings bond. You must keep in mind that you’ll lose some of your earnings if you withdraw them in the middle of the term. So, it would be a great way to increase your savings only if you won’t need the deposited money anytime soon.
What are the benefits that they provide?
Savings bonds come with benefits that you must take into account before making a decision. Here are the main reasons and why it is a viable option for you:
They offer bigger returns on your investment
This is the biggest advantage they have over others and which makes them a worthy option. If you look at the interest you earn in a regular deposit, you’ll find that the bonds pay out more than them.
The earnings would be unaffected throughout the term
As you know, the rates keep changing from time to time and affect your earnings on your deposit. If there is a decrease, your earnings on the money you lent won’t be reduced. Further, they will remain the same throughout the term.
Will it be a good investment in the long term?
Are you looking to build up your savings remarkably at a steady rate? In that case, this is most probably the best option that you have. You can get the most out of it by investing for the long term. That is because the longer the investment period is, the higher the rate of interest you’re offered. Therefore, you just need to look for the best deal.
What are the disadvantages of buying a Savings bond that you might have to face?
Just like all other arrangements of its kind, savings bonds can pose some disadvantages to an investor. However, they are not effective in all cases, just like it is with the advantages. So, you have to weigh them against the benefits to prevent any wrong decisions.
Here are the main risks that you have to face:
The deposit can’t be withdrawn before the maturity date
This is probably the biggest disadvantage that people face in this arrangement. Even though you can withdraw the money early, you’ll lose some of the interest earned on it in that case. Then, the investment wouldn’t have been worthwhile. Considering how you can face an emergency any time, you need to make sure that you won’t need the money before maturity in any case. For that, the money you have deposited has to be mean just for that purpose. You have to maintain separate savings to be used during times of emergency.
The interest won’t rise with the increase in other places
If the rates decrease in other places, you can be assured that they would remain the same for you. But, what happens if they increase in general? That’s when this investment would start posing as a disadvantage. You would continue to earn the amount that was fixed at the beginning.
Do you need to pay tax on the interest?
If you’ve invested somewhere, you’d want to get the most out of it. The more you’re able to earn tax-free, the better it would be. You have to pay a certain percentage of your returns from the deposit. It would depend on how much you’ve earned. If your income exceeds the personal allowance, you’d be taxed a certain percentage of it based on the pay band that you fall in. Currently, you can save up to £12,570 without having to pay tax.
What will happen if an investor dies during the investment period?
Many people who have invested in savings bonds are concerned about what would happen to the money if they die before the maturity date. For some reasons, such as their health condition, they might be feeling uncertain. If you have the same kind of concern, there is no reason to delay. Write a will, making clear how you want the money to be dealt with, in case of your death. That should be enough to relieve you from your worries.
Is there a way to get a tax-free bond?
There could be many purposes for you to save your money. It could be for your retirement or maybe for your first house. In any case, you’d surely like to find a way to pay as little tax on them as possible.
Legally, there’s a way you can be completely exempted from paying any percentage of your returns. All you need to do is buy a cash ISA bond. They work similarly to savings bonds. However, the only difference is that you don’t have to pay a single penny for your earnings.