Guaranteed growth is hard to come by in the current financial environment.
What’s more, the record low base rate has had a knock-on effect on high street savings accounts, eroding away value for the risk-averse.
So, when the government-owned National Savings and Investments (NS&I) launched a new three-year Investment Guaranteed Growth Bond earlier this year, the 2.2 per cent fixed interest rate was hailed by many as one of the best on the market.
But while the idea of guaranteed growth is certainly appealing, these bonds are not for everyone.
What are NS&I’s Investment Guaranteed Growth Bonds?
Each year, the Chancellor of the Exchequer announces the latest NS&I bond options during the Budget speech.
The subsequent bond offering is then on sale to the British public.
This year’s investment guaranteed growth bond is paying out 2.2 per cent AER over a fixed three-year term, with a minimum investment of £100 and a maximum of just £3,000.
The bonds will continue to be available at these rates until 5 April 2018.
Are they really worth your money?
When the bond was launched in April 2017 it was one of the best deals on the market.
Back then, the next best rate for a three-year bond was 1.63 per cent from Ikano Bank (now 1.95 per cent AER).
But in the meantime, a number of challenger banks have attempted to capitalise on the low-rate environment by offering much more favourable returns to investors with a longer time horizon.
- As of January 2018, the best rate for a FSCS covered three-year savings bond was 2.15 per cent was fintech bank Atom.
- An investment provider, Castle Trust, has a bond which pays 2.30% over a three year period. However, this account is only covered by an investment FSCS, up to £50k.
Meanwhile, Tesco Bank and Nationwide are both tempting new customers with a 3.0 per cent interest rate on current accounts, although these come with several caveats, and the rates are by no means guaranteed.
Compare 3 Year Bond Rates
And while 2.2 per cent is still one of the more competitive bond rates on the market, it still can’t beat the rate of inflation.
Earlier this month, it was revealed that inflation rose to 2.9 per cent in August, and the Bank of England governor Mark Carney has predicted that it will rise above 3.0 per cent before the end of this year.
That means that any savings or investment accounts which pay less than 3.0 per cent will be losing value in real terms.
However, in order to see returns of more than 3.0 per cent, investors have to be prepared to take on additional risk by investing on the stock market, or in the alternative finance sector via debt-based instruments such as peer to peer lending.
These options favour sophisticated, informed investors only, and a full risk assessment should be carried out before any money changes hands.
Who should invest in the NS&I bonds?
If you are hoping to pocket big returns, then the NS&I bonds are not for you.
For a start, you can only invest £3,000 in the bonds, and they are not ISA-eligible.
Having said that, if you have already used up your annual £20,000 ISA allowance, a three-year bond could be seen as a great low-risk investment for any extra cash.
And even if you invested the full £3,000 at the beginning of the bond term, the total value of your interest would be paltry £202.39 – way below the threshold for capital gains tax.
if you have a larger amount available to invest, you can then look to diversify away from simple cash investments in order to search for a better return.
The main disadvantage of these bond investments is the lack of liquidity that they offer.
If you withdraw any money from your bond before the end the investment term, NS&I charges a penalty equal to 90 days’ interest on the amount you cash in.
If you think you might need to release some money within the next three years (for instance, to buy a new car), then you may be better off looking at a one or two-year bond, or an instant access savings account instead.
These bonds won’t make you rich, but they are ideal for low-risk investors who are happy to lock away their money for a few years.
As with any new investment, take your time to read the small print before you sign over your cash, and make sure that it is the right option for you.