Written by Karen Bryan
The Santander Upfront Interest Bond sounds like an alluring savings account, as you get the three years of interest paid within six weeks of opening the bond. This equates to a payment of £1,000 interest on a deposit of £12,000. However, the fixed interest rate is only 3.36%; to put that into perspective, you can currently get a variable rate of 3.1% on an instant access Santander eSaver Issue 4 (minimum deposit of £1) or a fixed rate of 4.3% on a Clydesdale or Yorkshire Bank 3 Year Bond (minimum deposit £2,000). The Santander Upfront Interest Bond requires a minimum deposit of £10,000 and you need to have a Santander current account for the upfront interest to be paid into.
If you receive three year’s worth of interest in one tax year, that interest will be added to your taxable income for that tax year. This might take you above your tax threshold for that tax year, meaning you have to pay tax on the interest. However if the interest were paid in three separate tax years, you may avoid paying tax on the interest.
You also lose out of the benefits of compound interest but that may be more than compensated for by the fact that the spending power of your interest won’t be eroded by the effects of three years of inflation.
Anyone who has £12,000 available to tie up for three years in the Santander Upfront Interest Bond is probably not going to be desperate for cash. If I had £12,000 to invest and needed a bit of extra cash, I’d keep £1,000 of that £12,000 aside in the highest rate instant access account I could find, such as the Santander eSaver presently only paying around 0.3% less than tying my money up for three years in the Santander Upfront Interest Bond. Then I’d put the remaining £11,000 in the highest rate three year fixed rate bond I could find, where it would earn almost 1% more per annum than in the Santander Upfront Interest Bond.
A further strategy, but only for the self disciplined, would be to take out a credit card which offers a zero rate interest on new purchases, e.g. the Halifax All in One card which currently offers up to 15 months interest free credit on new purchases. You could then use that card to spend up to £1,000 which you have set aside in the instant access account to pay off the full credit car balance before the end of the interest free period. Then you could benefit from the interest earned on the £1,000 in the instant access account while being able to spend £1,000 on the credit card.
In my opinion, the Santander Upfront Interest Bond is one of these financial products which sounds good until you scratch below the surface.