Saving Bonds - Your Guide To US, UK & Canadian Savings Bonds

treasury savings bonds

saving bonds traderHaving looked at the US markets for savings bonds, let's now consider the products and markets available for UK investors. As we will see, the structure of treasury bonds is very different to that in the US market. Firstly let's start with a term that occurs regularly when discussing UK bonds, and that is the term 'gilts'. So what is a gilt? In simple terms a gilt is nothing more than a UK Treasury backed bond, so any bond underwritten by the UK Treasury is a gilt. So are all bonds, gilts - the answer of course is no, as there are many other types of bonds available which are issued  by a variety of commercial companies and widely traded. For our purposes we will only be considering gilts on this site, as we want to consider low risk bonds as a starting point for our saving bonds investing.  So in summary, all gilts are bonds, but not all bonds are gilts. Let's look at gilts in a little more detail.


treasury bonds

Gilts are the way in which the UK government raises cash from both individual investors like you and me, and large financial companies. Now you may come across other terms for gilts including British Government bonds, bonds, gilt edged securities, and fixed interest securities. All of them have one thing in common - they are all backed by the UK Treasury and therefore 100% secure, and secondly the holder receives a fixed rate of interest for the life of the gilt. Gilts can be thought of as  secure loans to the Government that are repaid at current par value when the gilts mature – unless the Government goes bust! At any time you can sell the gilts wholly or in part at the current stock market price, without penalty.

With regard to the tax issue this is very straightforward. The interest on the bond is paid gross but is subject to income tax and must therefore be declared on your tax return. Any gain made is not liable for CGT. Gilts which are held as part of your best ISA fund are free from both income tax and CGT and therefore do not need to be declared.

The UK gilt market is essentially composed of two different types, namely conventional gilts and index-linked gilts which together account for almost 100% of the market. So let's start by looking at conventional gilts for your saving bonds investment.

savings bonds uk

A conventional gilt is a liability of the Government which guarantees to pay the holder a fixed cash payment (coupon) every six months until the maturity date, at which point the holder receives the final coupon payment and the return of the principal. The prices of conventional gilts are quoted in terms of £100 nominal and is specified by it's coupon rate and maturity, so a 5% Treasury gilt 2020 is a conventional gilt with a coupon rate of 5% and maturity in 2020. The coupon indicates the cash payment per £100 that the holder will receive per year. This is normally paid in two equal amounts at 6 month intervals. So if you hold £5,000 of 5% 2020, then you will receive a total of £250, split into two payments of £125, 6 months apart. Payment dates are the 7th March and the 7th September with the original sum invested being returned to the holder on the maturity date of the 7th September 2020. Typically gilts have been issued over 5, 10 and 30 year periods, but in May 2005 the Government issued a new 50 year maturity gilt.

index linked gilts

The first index linked gilt was issued in 1981, and the UK was one of the earliest western economies to introduce such a bond. These gilts are very similar to the I series bonds that we looked at in the US market in that the interest rates are adjusted to take into account changes in inflation, which in this case are measured using the UK RPI ( Retail Price Index ) figures. Each index linked gilt is therefore composed of two elements. First there is the coupon rate which is quoted in the gilt's title, so a 2% Index Linked Treasury Stock 2020 will pay 2% annually ( split into two equal payments of 1% each). Secondly the rate is adjusted to take account of the RPI. Now unlike the US saving bonds, the calculation for the RPI factor is extremely complicated and beyond the scope of this site. However if you would like more details on how it is calculated, please follow the link which gives a detailed explanation - calculate the RPI adjusted rate. For index-linked gilts whose first issue date is before July 2002, the Bank of England performs the function of calculating and publishing the uplifted coupons on each index-linked gilt following the release of the RPI figures, while for index-linked gilts first issued from July 2002 onwards the DMO performs this function. If you would like details of the latest interest rates on index linked gilts from the Bank of England, please just follow the link.

buy savings bonds

Now like the US saving bonds, timing is critical, and your long term view of the market and the economy will dictate whether you feel conventional gilts or index linked gilts are more appropriate at any particular time. In simple terms your view of inflation will dictate whether you believe that Index linked or Conventional gilts are right for you. At present we are in the midst of a recession - interest rates are likely to fall and the government has a target of 2-3% for inflation. Now remember, and this is important, the UK government does not use the RPI for it's own inflation target, as this is too high!! It has used CPI since 2004 as this provides a more favourable figure for inflation than the old RPI figures which were used originally. If you would like a complete explanation please just follow the link - RPI or CPI. The actual RPI figures will generally be around 1.5% higher than those of CPI. Now in rough terms if the RPI figure is around 2.5%, then returns on index linked gilts will be more or less the same as for conventional gilts. Above this figure and index linked will perform better than conventional. Given that the latest RPI figures were 3.8% then at the moment Index linked gilts would be the better bet! However, please remember that these are long term investment saving bonds, and as such you need to have a longer term view of the market, rather then the next few months. If you think inflation over the term you want to invest is likely to be higher than that, then index-linked gilts could be the way to go.  

Now, finally on gilts, let's look at where they can be bought and sold, and where you can find the latest prices. There are many places to buy, both on line and in person, and as they are traded instruments are widely available in the secondary market via banks and stockbrokers. Both the Debt Management Office and the Bank of England offer a low cost broker service, and they can also be purchased from National Savings. The latest prices can be found in the quality financial press such as the financial times or from your broker. The DBO and Bank of England will also provide daily updates on price.

tax saving bond

Now I cannot leave this site on UK bonds, without mentioning both premium bonds and the various savings bonds available from National Savings. Again these are all backed by the UK Treasury, and whilst some are classified as savings bonds ( such as guaranteed income and investment bonds) most have been designed as tax free savings vehicles. In my opinion they are well worth including as part of your overall investment and tax planning arrangements, simply because they are safe, secure, and save tax. And who knows, you may even with the top prize on the premium bonds of £1 million - then you would have problem of where to invest it - a nice problem to have!

Finally, having looked at both the UK and US markets, now let's look at the saving bonds available in Canada.

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