NS&I - Tax-efficient investments

Overview

• different types of Individual Savings Accounts (ISAs)

• tax-exempt savings plans from Friendly Societies

• unique tax-free products from NS&I, including Premium Bonds, Savings Certificates and Children’s Bonus Bonds

All of the following products share the benefit of being tax-free, meaning they are free of UK Income Tax and Capital Gains Tax.

Individual Savings Accounts (ISAs)

ISAs make a great introduction to the world of investment as there is such a variety to choose from. You can invest up to £10,680* per tax year and you must be resident in the UK for tax purposes.

Most banks and investment companies offer a range of ISAs. There are two types:

Cash ISA

A cash ISA is similar to a savings account that pays interest, but the interest your money earns is tax-free. Cash ISAs are open to anyone over 16. They are one of the most popular cash savings accounts as they allow you to invest up to half your annual ISA allowance (£5,340*) per tax year, and give you guaranteed tax-free interest.

If you’re looking to invest in a cash ISA then shop around for the best interest rate. A competitive rate over a longer period is more important than a good introductory rate. Over the long term, you may build up a sizeable amount and you'll need to consider the benefits of compound interest.

If the interest rate falls, or fails to rise in line with others on the market, you can usually switch your cash ISA to another provider, but watch out for any penalties. Don't just close your current cash ISA or withdraw the money, as you will lose your tax-free benefits. Talk to your new provider to help arrange the transfer. You don’t need to transfer the whole amount either. While the current tax year's ISA can only be moved in full, you are allowed to split previous years' allowances between different providers. Some ISA providers may charge you a penalty if you decide to move your funds, so you need to factor this in when you choose your ISA.

Try to avoid withdrawing cash from your ISA as you cannot put it back without using up your current tax year's ISA allowance.

Stocks and shares ISA

If you’re 18 years or older and ready to take on some risk, you can choose to invest in a stocks and shares ISA, which allows you to invest in unit trusts or a selection of shares, for example. You can invest your whole annual ISA allowance of £10,680* in a stocks and shares ISA, and any capital growth is tax-free, as are any dividend payments that you receive.

Alternatively you can split your £10,680* between a cash and a stocks and shares ISA – you can invest up to £5,340* in a cash ISA and the remainder of your allowance in a stocks and shares ISA. For both types of ISA, you must be resident in the UK for tax purposes.

A new Junior ISA specifically for children will be launched in November 2011 to replace the Child Trust Fund.

Find out more about the Junior ISA>

Tax-exempt savings plans

Offered by Friendly Societies, these can help you build up a lump sum for any child through small regular payments. You can choose when the money is available for them, but the policy must run until they’re at least 16 and for a minimum of 10 years.

While they are essentially savings plans, they have the added benefit of a small amount of life assurance protection.

Friendly Societies have been around for hundreds of years providing savings for families, and their popularity has stood the test of time.

Find out more about Friendly Societies >

Unique tax-free investments from NS&I

Premium Bonds

NS&I Premium Bonds give you the chance every month to win £1 million. Instead of paying interest, NS&I holds monthly prize draws with a £1 million jackpot and over a million other cash prizes. NS&I gives you a unique Bond number for every £1 you invest. Each Bond number has a separate and equal chance of winning, and any prizes you win are free from UK Income Tax and Capital Gains Tax.

You can invest up to a maximum of £30,000, and all money invested is 100% secure. You can cash in all or part of your Bonds at any time, but remember that inflation can reduce the true value of your money over time.

Index-linked Savings Certificates

NS&I Index-linked Savings Certificates guarantee that your investment will grow in spending power each year, whatever happens to the cost of living. That’s because they ensure the value of your savings always stays ahead of any rise in the Retail Prices Index (RPI) when held for at least a year.

You can invest up to £15,000 per Issue, and the returns are free from UK Income Tax and Capital Gains Tax.

Fixed Interest Savings Certificates

NS&I Fixed Interest Savings Certificates are lump sum investments that earn guaranteed rates of interest over set terms. You can invest up to £15,000 per Issue, and the returns are free from UK Income Tax and Capital Gains Tax.

NS&I Children’s Bonus Bonds

These are long-term investments from NS&I that offer guaranteed returns that are free from UK Income Tax or Capital Gains Tax for both the parent and the child.

The investment earns a fixed rate of interest for five years, and a guaranteed bonus is added on the fifth anniversary. This happens for every five years that the money is invested until the child’s 21st birthday, when a final bonus is added.

NS&I Children’s Bonus Bonds allow you to invest for a child’s future in their own name. Anyone aged 16 or over can invest for children under 16, up to a maximum of £3,000 per Issue.

Please note that some of NS&I’s investments may not always be on general sale.

Find out more about NS&I’s tax-free investments >

*figure applies to 2011/12