Top 5 Savings Bonds For 2021

If you’ve got some spare cash in a savings account and not sure what to do with it, then you might want to consider investing in savings bonds. Although the yield rates on offer are rather low in comparison to other financial assets, they offer a safe and secure mechanism to earn regular interest.

However, knowing which savings bonds to invest in is no easy feat, not least because there is so much to consider. Whether it’s the length of the bond agreement, the strength of the company issuing them, or the rate being offered, it is important that you have a firm understanding of how savings bonds work.

In this comprehensive guide on savings bonds, we’ll cover everything you need to know. This will include a breakdown of what savings bonds are and how they work, how much you are likely to make, and how you can get started with an investment today.

What are bonds?

Before we explain what savings bonds are, it is important that you first have an understanding of what a bond actually is. In its most basic form, investment bonds are issued by companies and governments as a way to raise money. When you buy one of the bonds that they issue, you are essentially lending them capital.

In return for parting with your hard-earned cash, the issuer will pay you interest, which is usually paid at the end of each year. Each bond agreement will also have a fixed term attached to it. At the end of the term, which is known as the maturity date, you will receive your original investment back in full.

For example, let’s say that you invest £5,000 into a bond that pays 2% per year, with a term of 3 years. At the end of each year, you receive 2% in interest payments, which amounts to £150 per year. Once the bond expires, which is after 3 years, you’ll then receive your £5,000 back.

That means that you would have made £450 in interest payments on your original £5,000 investment.

So now that you know what bonds are, let’s take a look at how savings bonds work.

What are savings bonds?

When it comes to savings bonds, these operate in much the same way as any other bond. However, they are often attached to savings accounts offered by banks and building societies.

In most cases, this is a way to get you to deposit your savings with a particular institution, and return, they’ll offer you a higher rate of interest than you would otherwise get in a traditional current account.

The important thing to remember is that the savings bonds offered by financial institutions will not allow you to withdraw your money before the bond term matures. Even if a bank or building society does allow you to cash out early, you’ll likely receive less than you originally invested.

As such, you should only ever invest in savings bonds if you are prepared to forget about the money until the bond expires.

How long do savings bonds last for?

When you start your search for savings bonds, you will need to consider for how long you want to invest. This is known as the maturity date, which is expressed as months or years. In most cases, savings bonds are available at a minimum period of one year, however, this is usually longer. Savings bonds rarely exceed five years.

The general rule of thumb is that savings bonds with longer terms pay higher rates of interest. The main reason for this is that technically speaking, the longer the bank or building society has to pay you back, the higher the risk of them defaulting.

How much can I make when I invest in savings bonds?

When we assess how much we are going to make from an investment in bonds, this is expressed as the yield. In layman terms, the yield is the annual interest that you will make from your investment, and it’s represented as a percentage. For example, if the yield on the savings bond is 3.5%, then this is the amount that you will be paid in interest every year.

The yield is one of the most important factors that you need to evaluate when assessing whether or not to invest in savings bonds.

A good starting point is to assess how much risk is attached to the investment. For example, if you are buying savings bonds from a brand new building society that doesn’t have much of an established record in the UK, then you should expect a higher yield in comparison to a reputable bank.

In most cases, you can expect to make between 1-3% per year when investing in savings bonds.

How do savings bonds work?

As we mentioned earlier, savings bonds are usually offered by banks and building societies. As such, you’ll likely need to open an account with the specific financial institution in order to benefit from the bonds on offer. However, this isn’t always the case, as some providers will allow you to buy savings bonds without opening an account.

Once you’ve opened the account, you will then need to transfer the money over to the bank. At this point, you will be the rightful owner of the savings bonds.

Depending on the frequency of the payments (annually or quarterly), you will then receive interest from the bank for the duration of the bond agreement.

At the end of the term, the bank will then repay the full amount that you originally invested. This will either be transferred to a low-interest paying account with the same institution or to a bank account of your choosing.

Are savings bonds safe?

Regardless of the asset that you choose to invest in, there will always be an element of risk attached to it. However, in the case of savings bonds, these are virtually risk-free for two key reasons.

Firstly, you need to consider that you are lending money to a financial institution. These will be banks or building societies with an established reputation. Even if the bank is relatively new, or it’s a foreign bank set up in the UK, the institution will be heavily regulated.

In this sense, the only way that the bank or building society wouldn’t pay you back is if they were no longer trading. However, the good news for you is that even if this was the case, you would likely be covered under the Financial Services Compensation Scheme (FSCS).

For those unaware, the FSCS was set up by the UK government in response to the 2008 financial crisis to protect the bank account savings of UK citizens. As of 2021, the FSCS will protect savings of up to £85,000, should the financial institution go bankrupt.

However, it is important to remember that not every bank is protected under the scheme, so always check this first.

What are the pros and cons of investing in savings bonds?

Best savings bonds in 2021

If you’re looking to start investing money in savings bonds, then you’ll be pleased to know there are thousands to choose from. However, this can make it difficult to know which ones to pick. To give you an idea as to some of the savings bonds available, we’ve listed 5 of the best.

Glossary of Bonds Terms

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