Off The Beaten Track

Retail bonds and fixed deposit accounts: medium term investment vehicles worth looking at

This article first appeared in City Press. You can find the original article here.

For those who are looking to save for the medium term and don’t plan to touch the money for at least two years, the RSA Retail Savings Bond is an attractive option.

Retail bonds have no fees such as admin costs or monthly account costs, and the interest rate returns are set above inflation, meaning the value of your money is not diminished over the investment period and capital is guaranteed.

There are two types of RSA retail bonds on offer from Treasury: fixed-rate bonds and inflation-linked bonds. These have different options in terms of investment time frames.

*Fixed-rate retail savings bonds are made up of a series of bonds with two-year, three-year and five-year investment periods, which are currently paying fixed rates of 9%, 9.25% and 9.75%, respectively.

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RSA retail bonds interest rates (fixed vs Inflation linked) for Feb 2016. Source: rsaretailbonds.gov.za

The fixed-rate retail savings bond only pays interest twice a year, which you can elect to reinvest. If, however, you are older than 60, you can opt to receive your interest monthly.

Retail savings bonds offer a better return when compared with traditional fixed-deposit accounts over a 24-month period.

*For amounts between R1 000 and R9 999, Absa offers a 6.6% to 8.25% interest rate, and for amounts above R10 000, it offers a rate of between 7.15% and 8.5%.

absafdsavings

Absa’s rates and fees

*Capitec offers an 8% rate for investments between R10 000 and R24 999, and 8.25% for investments between R25 000 and R99 999.

Capitec’s interest rate. Source: http://www.capitecbank.co.za

*FNB’s rate is 7.7% for deposits between R10 000 and R249 999.

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FNB’s interest rates chart, February 2016

*For an ordinary fixed-deposit account of between R1 000 and R9 999, Standard Bank offers a 6.15% interest rate (annually) and 6.65% on maturity.

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Standard Bank’s interest rates as at 30 Jan 2016. Source: http://www.standardbank.co.za

Inflation-linked retail savings bonds pay a lower interest rate, but the capital amount is adjusted for inflation so that it is not eroded by inflation, while still providing some income.

The three-year, five-year and 10-year investment terms pay an interest rate of 1.5%, 1.75% and 2%, respectively. The inflation-linked option pays out interest income twice a year and has no option to reinvest the interest.

Nedbank offers the Green Savings Bond, which was launched as part of an initiative aimed at contributing to a greener economy. It is also a cost-effective option because there are no fees related to the account and the minimum investment account is also set at R1 000.

Nedbank doesn’t offer a fixed-deposit account for periods of more than 18 months, but has the Green Savings Bond instead. *For 24-month deposits, an individual who wishes to have their interest paid monthly would receive a rate of 8.35% a year. For a biannual interest payment, the rate is 8.5% a year and, if interest is reinvested, the effective rate is 9.05% a year.

*For Nedbank’s Seniors Green Bond (aimed at clients who are 60 and older), the rates are 8.5%, 8.6% and 9.22%, respectively.

Nedbankfdrates

Nedbank’s Green Savings Bonds and Seniors Savings Bonds interest rates as at February 2016

Before investing in bonds or a fixed-deposit account, you should make sure that you will not need to withdraw funds before the maturity date. Early withdrawals carry penalties for both bonds and fixed-deposit accounts.

Retail savings bonds are subject to taxation. Currently, for people younger than 65, the first R23 800 in interest earned during a tax year is exempt from taxation – this means you could
invest up to R250 000 in the two-year retail bond without paying tax.

For anyone older than 65, the first R34 500 in interest earned in a tax year is exempt.

While retail bonds are great for short- to medium-term investments, they should only form part of your portfolio, especially if you have medium- to long-term investment horizons, because growth investments such as equities tend to outperform bond returns over time.

Investing in retail bonds is fairly easy and you can buy bonds at any SA Post Office branch, at most Pick n Pay outlets and online at rsaretailbonds.gov.za.

You can also visit Treasury’s offices in Pretoria, or call directly on 012 315 5888.

*These interest rates are subject to change so look at the website before choosing a product.

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