National Savings Certificates

National Savings Certificates, which can be bought or repaid over the counter of any bank or post office, are a very different animal from other forms of cash deposit investments, for they do not earn interest at all. Instead, their repayment value increases year by year, at an escalating rate, and (most important) their increase in value is entirely tax free to everybody.

Comparing the yield on National Savings Certificates from that on other money deposits is a tricky business, for the rate of growth in value starts quite low and builds up to the maximum in the fifth year. The table below illustrates the growth of the 19th issue which was first issued in February 2000. Purchase price is £10.

Value at the Yield Equivalent yield

end of year gross to basic-rate


1st year £10.50 5% 7.14%

2nd year £11.40 8.57% 12.24%

3rd year £12.45 9.21% 13.16%

4th year £14.1 13.25% 18.93%

5th year £16.30 15.95% 22.79%

It will be seen from this table that for a non-taxpayer it does not pay to buy National Savings Certificates unless they are held for the full five years, since 14% interest can be earned on a bank deposit account For a basic-rate taxpayer, however, it could pay him to invest only for four years. The critical period occurs during the fifth year, at the end of which the year's growth rate is at the dramatic level of 22.79%.

As a general guide, therefore, it does not pay to invest in National Savings Certificates unless there is an intention of holding them for five years. The average annual compound growth rate over five years works out to 10.33%; since this is tax-free a basic-rate taxpayer would need to obtain a gross yield of 14.75% to compete with it. So long as the bank deposit rate exceeds this figure, however, this is not difficult. So why buy NSCs at all?

The answer is, of course, the same as before: yield on NSCs is guaranteed and would look very attractive in later years if market rates of interest were to fall. And were you to wait for that fall you might be too late, for this issue of NSCs would probably be taken off the market!

Maximum holding permitted per person is £5,000 of certificates of the 19th issue, in addition to any of earlier issues held.

Tax Not Reclaimable

No tax can ever be reclaimed on building society interest in any circumstances. This means that for a person with a very small total income that is not in the taxable range at all, investing in a building society may not be a good idea, for he would be effectively paying more tax than he need. If, for example, he were to put his money in a bank deposit account instead of a building society he would get a net yield of 14%, instead of the net 10.5% from the building society.

No fixed rates

It should be borne in mind that the interest rates from building societies are fluctuating... see: Tax Not Reclaimable

Personal And Business Finance 2013

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