Posted on by Damien
Yesterday Santander launched a 'revolutionary' savings bond which promises to give investors interest upfront. With the promise of £1,000 of interest upfront (technically upfront means within six weeks of the initial deposit) for every £12,000 deposited it's grabbed the headlines. But look past the headlines and it soon becomes apparent that this nothing more than a poor savings rate, not a great one, with a gimmick to sell it.
So what is the deal?
- Customers receive £1,000 (net of basic rate tax) for every £12,000 they deposit. The £1,000 is theirs to do with as they please.
- This is equivalent to a 3.36% gross/AER fixed (Tip: remember AER stands for the Annual Equivalent Rate and shows what the interest rate would be if Santander paid interest and added it to the account each year)
- Minimum investment of £10,000
- Withdrawals or account closures will not be permitted during the fixed term period - which is 3 years.
- You have to open a Santander current account as well (unless you already have one) in order to receive your interest payment
Why is this not a great deal?
Well after looking around at other 3 year savings bond products you can immediately find a better rate. Both Clydesdale Bank and Yorkshire banks offer an equivalent rate of 4.3% with a minimum deposit of £2,000 on a 3 year savings bond.
What that means is that over the 3 year term a basic rate tax payer saving £12,000 into the new Santander product will receive a total of £13,000 (assuming they simply spent the £1,000 upfront interest rather than reinvest) while a Clydesdale saver will receive a total of £13,281. That's £281 difference.
But if the upfront interest attracts you why not simply put £11,000 into a Clydesdale bond and go on a shopping spree with the £1,000 you keep back. After the 3 year term is up a basic rate taxpayer would still receive back £12, 175 from Clydesdale. Still better than the Santander deal!!!
So it's just clever marketing?
Pretty much. Don't get me wrong I applaud the innovation from Santander, it's not the concept that's the problem - it's the interest rate. But having said that, teasing people with a promise of upfront interest seems like a ploy to boost the number of current account holders (as that's where the upfront interest must be paid).
I suppose it's a case of if it seems too good to be true it probably is.
But there are some people it may benefit - but only just
One quirk of receiving all your interest upfront is that it is taxable in the current tax year. So if you are a basic rate tax payer then you will receive the £1,000. But higher rate tax payers must pay additional tax via their tax return. Consequently if someone who currently a basic rate tax payer was due to become a 50% rate tax payer from next tax onwards (hardly likely admittedly) receiving all the interest upfront has obvious benefits. If they instead received interest monthly then once they became a 50%rate tax payer their interest payments would be liable to higher rate tax.
For example under this scenario someone would receive £13,000 after 3 years from a £12,000 investment in Santander Upfront Interest Bond but around £12,952 from either Clydesdale or Yorkshire bank. But even this extreme example hardly makes it worthwhile!