By There is a selection of options for savers and these days savers are often on the look out for an option that will get them a bigger amount of interest. With interest rates being so low, it means that sometimes savers will find that the amount of money they get is not even in line with inflation. This means that any money that they are saving is reducing in value which makes it feel not worth bothering with. There are some accounts though, which pay higher interest and bonds are one of these. They could provide a solution to those that want a higher return.
How do bonds work?
A bond works differently to a savings account. You buy a bond and then you normally have to hold onto it for a certain time period. Once that time has passed you will get interest on it and sometimes a bonus which usually add up to more than the interest rate on a conventional savings account. If you cash in the bond before the time period is up you will normally not get paid the bonus or get a lower interest rate or maybe no interest at all. The rules will differ between the different bonds and it is important to make sure that you understand how they work before you decide on whether you should take one up and which one you should choose.
How do they differ?
Bonds are issued by different places and therefore differ in the way that they work. Some bonds are issued by the government. These can either be fixed rate bonds, which will guarantee a certain interest rate as long as you keep the money in for a certain time period and they also issue premium bonds. These work differently as you buy entries into a draw and you get paid prizes if you win rather than any interest. This means that you could win a very large amount of money or you could win nothing at all. You can withdraw your money though without losing anything but you will no longer be entered in the draw. These prizes are free of tax because they are seen to be gambling, which is also free of tax.
You can also get bonds from private companies. These may work in a similar way, in that you will be able to get a bonus and interest if you leave the money in for a certain amount of time. The interest will tend to be higher than conventional savings and it will usually be higher than government bonds as well.
If you start looking at bonds you will find that they differ in a lot of ways. The amount of time that you need to tie your money up will differ but they will also differ in how much they pay out. You may also find they differ in how much you can pay in as well. Bonds will usually be worth a certain amount, perhaps £1,000 or more so you will need to have a lot of money to pay in normally. However, as they do all differ it is worth checking this out.
Are they right for me?
A bond can be a good idea for anyone that is hoping to get more money form their savings. The risk is low which means that you will get your money back and you should get the interest as well and a bonus if you make no withdrawals. However, you will have to prepared to tie your money up and this is likely to be for a minimum of a year and could be five years or even longer. You will therefore need to be sure that you have money that you can use that you will not need for anything else. If there is a risk that you will need the money, then it could be worth considering a different way to save your money. It can be hard to predict whether you will need your money during the course of the next year or even further ahead, however, if you have money saved elsewhere which you can get instant access to then this may mean that you will have enough to allow you to withdraw some if you need it without having to withdraw form the bonds.
Some people also do not like the thought of having government bonds. If they do not like the party in power or do not like the things that the government funds then they may feel that they do not want to buy bonds which will effectively lend the government money to spend on what they see fit. However, others may have a problem with buying bonds from financial companies that they feel invest in businesses that they do not like. Others, of course, may not really worry about things like that.