What You Need to Know About Savings Bonds
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by: Hughes John
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Date: Mon, 16 Nov 2009 Time: 9:08 AM
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Savings bonds work for people who choose to put away their money for a fixed period of time in order to earn a great fixed rate of interest. This type of investment puts your money to work for between one and five years and in return you get the reassurance of a fixed rate of return.
When looking for the best savings bonds for your investment plans, you will need to understand four key terms so that you can compare and contrast accounts and really choose the best one for you. These four terms are: the AER which stands for Annual Equivalent Rate, the Term of the Plan, the Minimum Balance, and the ISA option.
The Annual Equivalent Rate (AER) is what your savings will earn in a year if left for twelve months, assuming interest is paid annually. Accounts with the same rate of interest may have different AERs according to how frequently they pay you interest, for example an account which pays interest monthly will have a higher AER than one that pays the interest yearly, because with monthly interest you then get something called ‘compound interest’, which means you get interest paid on the interest that has already been added to your account.
Of course, everything is not always as straight forward as it appears, as savings providers may boost the AER by adding a bonus. This will be added into the AER of year one, but if you were to leave your money in the account for the second year where you received no bonus, then your AER would be much lower the second year.
The term of the plan refers to how long your account will last; with savings bonds you usually have to invest your money for a fixed period of time, the term is how long that period is.
The minimum balance is the lowest amount of money that you can deposit to open an account; and sometimes you may also be given a minimum balance that your savings account can’t drop below. The minimum balance for starting a savings account plan can range from £1 to £25,000
The last bit of terminology is the ISA, this is an Individual Savings Account; these accounts are tax free savings accounts, with terms that can last from one to thirty years depending on the plan. There are two types of ISA: a cash ISA and a stocks and shares ISA. It is the cash ISA which can also be invested as a savings bond, so you get a fixed rate of interest and benefit from having to pay no tax on your savings. Choosing the duration of the term will greatly depend on how long you’re can stash away your money without needing access to it. If you’re not sure how long you want your savings account to last, choose a company that is flexible so that you can withdraw your money when you want to.
There is a maximum amount that the Government allows you to invest in an ISA each year however, because of the tax benefits; this ranges from £3,600 if you’re 16 or over, and rises to £5,100 if you’re over 50; although from next April 2010 the over 50 rate will apply to everyone.
Choosing the right saving bond for you should be thought through thoroughly, to make sure you get the right amount of interest based with how readily you will need to withdraw the money. So look at the type of bond you think you’re interested in first and then compare the companies providing them.
Savings bonds companies have different terms and conditions, so it’s worth looking through to see exactly what you’re being offered, especially if a bonus is being given as it will skew the AER.
Also, make sure you know how to withdraw your money and how long you have to keep it in the bond for. Some companies will allow for no withdrawals at all, while others will enable withdrawals at strategic times and still others will allow you to withdraw when you want to, but could penalize you heavily for doing so.
Opening up a savings account and applying for a savings bond are usually options taken by people who want to know that their money is safe as in the UK it is backed up by the government’s £50,000 guarantee. This is one way to help make you financially stable and ready for anything unpredictable it means that you can invest in one and will have one less worry about your future.
About the Author
John Hughes is author of this article on Savings Bonds. Find more information about Savings Accounts here.
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