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The granny state

IFAs have differing opinions over whether the tax advantages of National Savings & Investments products outweigh their generally low rates of return.

Bestinvest business development manager Justin Modray is a big fan of National Savings’ index-linked certificates which are free of income tax. The three-year and five-year products pay 0.95 per cent and 1.05 per cent over the retail price index.

Modray says: “For those who can tie the money away for that period of time, it is a good way to safeguard cash in an investor’s portfolio against inflation. The National Lottery has proved that we are a nation of gamblers and premium bonds allow people to have a gamble with their cash without putting it at risk.”

Hargreaves Lansdown senior investment analyst Meera Patel is also a fan of premium bonds, which average a 3.2 per cent return but offer the chance to win up to 1m, depending on National Savings computer Ernie. There is also the chance of no return but the capital is guaranteed.

She says: “I invest in premium bonds myself, even though I know that they are theoretically a poor investment but it is always nice to get 50 in the post and I am selfish and want to get the million. As someone who wants to buy a house soon, I invest in premium bonds and cash Isas because I cannot afford to have my money tied up in equities.”

Patel feels that National Savings products should appeal to higher-rate taxpayers looking to use all their tax-free allowances but points out that the products are also designed to appeal to people who do not fully understand what is available on the market.

She says: “The online ING account offers 5 per cent, whereas the National Savings easy access account offers 3.5 to 4.55 per cent, depending on the amount invested. Even after tax, the ING account is likely to be better value. It makes me wonder why on earth people do not shop around.”

Baronworth director Colin Jackson gives the example of National Savings pensioner bonds, which compare poorly with guaranteed income bonds, despite apparent tax advantages.

He says: “Take a five year pensioner’s bond, which pays 4.15 per cent gross. If a pensioner has 50,000 to invest, I can get them 4.3 per cent net with Countrywide in a guaranteed bond. That is the equivalent of 5.37 per cent gross.

“On a one-year pensioner’s bond, a 25,000 investment pays 4 per cent gross. I can get them a Pinnacle guaranteed bond that pays 5.02 per cent gross for someone paying basic-rate tax.”

But Jackson points out there are a lot of investors who will not go anywhere except National Savings. These people, he says, are generally without the knowledge or access needed to make an informed decision.

He says: “Pensioners are getting ripped off. They do not have the internet, they do not hear about the alternatives and they feel comfortable with National Savings but you have got to be hard-nosed.”

Chambers Morgan James director Marlene Shalton thinks that people are generally more commercially aware these days and shop around more than they used to but there is a lot of consumer apathy. She says: “I am amazed, for example, at how many people have money sitting in current accounts that earn them no interest. I say to them, would you throw 500 out in the street? That is effectively what they are doing.”

Buckles Investment Services senior investment adviser Colin Williams thinks Nat-ional Savings benefits from consumer narrow-mindedness. He says: “Some people do not like ING, for example, because they do not know the name and it is an internet account. By contrast, most grannies just love National Savings.”

National Savings spokes-man Jonathan Akerman def-ends the products and says National Savings is often criticised for its interest rates but it is not in the business of headline-grabbing bonus rates. Its approach is to offer consistency and accessibility to customers.

He says: “In terms of tax advantages, investors are getting something that other companies cannot offer, particularly for higher-rate taxpayers investing in index-linked savings certificates.A higher-rate taxpayer would have to find an equivalent account paying 7.42 per cent in this case. When you look at the details of our products you can see the point in investing. Our children’s bonus bonds offer tax free interest until the child is 21, for example.

“The fundamental thing is that we are unique – we offer 100 per cent capital security.It will take people time to recover from the shocks of the stockmarket’s performance over recent years and they are thinking that perhaps a headline rate just is not enough these days.”

Despite the granny stereotype, National Savings holds 80 per cent of the market for guaranteed equity bonds, which it largely sells to 35-50 year-olds.

These bonds pay 105 per cent of growth in the FTSE 100 over five years, providing a transparent investment solution for a younger market. However, some IFAs would question the merits of relying on the FTSE 100’s performance, even if just to beat inflation.

The rates offered by National Savings products, despite apparent tax incentives, are not spectacular but are reasonably competitive.

Whether IFAs choose to recommend them to cautious investors as an option for investing the cash portion of their portfolios is likely to depend on rate comparisons. But following the stockmarket problems of recent years,the strength of the National Savings brand is hard to deny. After all, everybody trusts the Government, don’t they?

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