How do US savings bonds work
Savings bond: is the low-risk investment still worthwhile?
What is a savings bond?
A savings bond is a fixed-interest investment. You lend your money to a bank and receive a certificate (on paper or virtually in online banking) on which this claim is noted together with your name. At the end of the agreed term, the bank will buy back this document and, in addition to the capital invested, pay you the agreed interest amount. Savings bonds are therefore a hybrid of a long-term savings deposit and an interest-bearing security. They are issued by the banks free of charge.
Savings bonds are registered bonds, which means that they are made out to a specific person. Usually this is you as the buyer. Since the savings bond is written out in your name, the bank may only pay out the start-up capital and interest to you personally after the end of the term. Another special feature of the savings bond is that early termination is usually not possible.
Interest: Savings bonds currently offer little more than 1%
The savings bond is characterized by a fixed interest rate that is guaranteed for a certain period of time. Most banks set your money between 1 and 10 years. You cannot dispose of your money during this period. The savings amount cannot be topped up during this period either.
In general, the longer the term, the higher the interest rate that the bank offers you. Because interest rates are currently very low, even for savings bonds with a term of several years, you hardly get more than 1% interest. Below we show you the current best offers from German banks with a term of 4 years:
Savings bond offers from German banks with a term of 4 years
|Ziraat Bank||0,65 %|
|Credit Plus||0,60 %|
|SWK Bank||0,45 %|
Source :vergleich.de, as of January 2021
Study: Investors avoid long fixed interest rates because of the low interest rates
In times of high interest rates, it is attractive to secure the interest rate for several years. If, on the other hand, interest rates are very low, as they are now, you shouldn't commit yourself too long. The reason: if interest rates rise again, you can benefit from better offers.
Due to the general level of low interest rates, investors currently see no advantages in locking their money over a long period of time. This is also a result of the wealth barometer of the German Savings Banks and Giro Association (DSGV), which examines German savers and their investment plans once a year. According to the current study from 2018, fewer and fewer respondents see fixed-term deposits and fixed-income securities as suitable products for asset accumulation.
Research byvergleich.de shows: Many banks have withdrawn savings bonds from the market!
The banks are reacting to falling customer demand. At the savings banks, the stock of savings bonds fell between 2007 and 2016 from around 86 to a good 27 billion euros. “The demand from customers for savings bank letters, which are usually given a maturity of 2 to 10 years, has fallen sharply,” says the press spokesman for the German Savings Banks and Giro Association, Alexander von Schmettow. “Customers are less and less willing to commit themselves in the medium to long term. Due to this limited demand, some savings banks are likely to have discontinued the Sparkassenbrief offer in the meantime. ”Samples from Comparison.de come to the same conclusion.
The situation is similar with the Volksbank and Raiffeisenbanken. Here, too, there is a tendency for savings bonds with certificates to be offered less and less, says the association's spokeswoman Cornelia Schulz.
Savings bonds continue to be one of the safest investments
Even if many banks have removed savings bonds from their range of investments, that does not mean that savings bonds per se are no longer recommended as an investment option for savers. The savings bond is particularly interesting for large amounts because it is considered a very safe form of investment and is covered by deposit insurance up to € 100,000.
A savings bond could be the right investment for you if you ...
- find a high level of security more important than a high return.
- Want to invest your money in the medium to long term.
- can definitely do without the capital employed for a certain period of time.
- Place value on a fee-free system.
- Want to postpone interest income into the future in order to save on capital gains taxes (with the discounted or discounted savings bond model).
Savings bond comparison: There are these types of savings bonds
There are 3 different types of savings bonds, all of which work according to the basic principle of "fixed investment amount, fixed interest rate and fixed term". They only differ in when and how the interest is paid out to you:
- The conventional savings bond is designed to be paid to you annually (or in some cases monthly) for the period of the investment. With this type, you forego your invested capital during the agreed term, but you can dispose of the amounts generated. For example, if you invest € 5,000 for 5 years at an interest rate of 1.0%, you will receive € 50 annually, for a total of € 250 in interest.
- The compounded savings bond is a variant in which the interest accumulates until the end of the term and is only then paid out. As a saver, you benefit from the so-called compound interest effect. If, for example, you invest € 5,000 for 5 years at an interest rate of 1.0% and leave the interest on the savings bond and add interest, you will be paid € 255.05 interest at the end of the term. Please note that paying out the entire interest at the end of the contract could exceed your tax-free allowance. The lump sum for savers is € 801 per year for single persons and € 1,602 for married couples. For everything that goes beyond that, you have to pay a flat tax of 25%.
- The discounted savings bond works the other way around. At the beginning you determine what amount you would like to be paid out at the end. Based on the interest rate and term, the bank calculates the initial amount you need to invest. For example, if you want to reach € 5,000 in 5 years and the interest rate is 1.0%, then you need to deposit € 4,757.33. With this variant, too, the entire interest income is taxed in one sum, provided that it exceeds your lump sum.
Some banks also issue savings bonds as a Bearer bonds out. The special thing about it: The owner of the certificate remains undefined. This is rather unusual, but nothing to worry about in and of itself. Just make sure that there is nothing in the small print about a "subordination agreement". Because that means that in the event of a bank failure, all other creditors are first served before you, as the owner of the savings bond, receive compensation. In contrast to registered bonds, bearer bonds are not covered by the statutory deposit guarantee.
At a glance: Savings bonds offer these advantages and disadvantages
Like any financial investment, the savings bond also has its advantages and disadvantages. Before you invest your money in a savings bond, you should weigh up the strengths and weaknesses of the type of investment:
The advantages of the savings bond:
- Savings bonds offer you planning security.
- Because both the interest and the term are fixed, you can calculate the return in advance.
- With a savings bond, you buy a security, but you don't have to worry about price-related losses in value, as savings bonds are not allowed to be traded on the stock exchange.
- An additional security plus is that savings bonds are covered by deposit protection. Amounts up to € 100,000 are protected within the EU.
- There are no costs or fees associated with the savings bond.
- The terms can be chosen freely.
- Savings bonds can be borrowed. While you cannot access your money during the term, you can use the value as possible collateral for a loan.
The disadvantages of the savings bond:
- With a savings bond, the money is firmly invested. You must therefore be sure that you will be able to forego the capital invested during the term. Banks are particularly strict with savings bonds and generally do not allow “emergencies” to apply.
- The interest income is comparatively low. Compared to funds or stocks, savings bonds do significantly worse.
- Savings bonds are inflexible, because the term and interest are fixed when they are signed. The capital cannot be topped up in retrospect either.
- With discounted and discounted savings bonds, the interest is paid out in one fell swoop at the end of the contract. Then you have to expect to pay the final withholding tax. This always applies if the income exceeds the saver lump sum of € 801 per saver.
- Only a few banks still offer savings bonds.
How do savings bonds and fixed deposits differ?
With both savings bonds and fixed-term deposits, you invest a certain amount for a certain term with a certain interest rate. Because the two forms of investment are very similar, many banks now only offer one of the two products. Most institutes have opted for fixed-term deposits as an investment product. Other banks, such as the Santander Consumer Bank, on the other hand, only offer their customers savings bonds as a fixed investment option.
Fundamentally, savings bonds and fixed-term deposits differ in terms of the type of investment: The savings bond is one of the securities, while the fixed-term deposit is a classic bank deposit with a separate account. They also differ in a few other ways:
Savings bonds and fixed-term deposits: these are the main differences
|Savings bond||Fixed deposit|
|running time||Usually between 1 and 10 years annually||Can be agreed individually, usually 3, 6 or 9 months as well as annual intervals|
|Interest credit||Different models: conventional, discounted or compounded savings bonds||Usually once a year or at the end of the term|
|Ownership||Usually registered bonds||Classic bank deposit with a separate bank account|
|Automatic extension||No - expire without reinvestment||Yes - will be re-created without notice at the current conditions|
|Early termination||Not possible||Not provided, but there are exceptions in emergency situations with corresponding cancellation costs|
A comparison of savings bonds and fixed-term deposits: where do you get the best interest rates?
When it comes to the level of interest, savings bonds and fixed-term deposits are also close together. The interest rate increases as the term increases.
Step by step: how do I buy a savings bond?
When buying a savings bond, you have to go through steps similar to opening an account. We will show you how to buy a savings bond in 4 steps.
Step 1:Compare offers
Since the conditions are very different from bank to bank, you should first compare the various offers of the banks with the help of a savings bond comparison. Note that there is actually a fixed deposit hidden behind many products. Above all, savings banks, Volks- and Raiffeisenbanken as well as Deutsche Bank have withdrawn their savings bonds in whole or in part from the market. So it is primarily the German direct banks and financial institutions in other EU countries that still offer savings bonds with competitive interest rates.
Step 2:Open a reference account (for new customers)
If you are not yet a customer of the bank you have chosen, you may need to open a free call money account first. It serves as an internal reference account for deposits and withdrawals. In the meantime, this works online at many banks by filling out an application and providing your personal data and, in the next step, for example, to be identified by the Deutsche Post Postident. Some banks also accept an external reference account.
Step 3:Submit an application to purchase a savings bond or create a savings bond yourself
If the bank does not require an internal reference account, you as a new customer can directly fill out an application to buy a savings bond. If you fill out the application online, you will also need to identify yourself in this case. Once the bank has processed the application, you will receive the documents and the access data for online banking by post. As an existing customer, you can easily create savings bonds yourself in online banking and receive the confirmation documents by email. At many banks this also works by phone or informally by letter.
Step 4:Invest your money
In order to invest in a savings bond, many banks require a minimum investment amount. Depending on the financial institution, the sum is between € 500 and € 2,500. The sum will either be debited from your reference account or transferred by you. Also remember to issue an exemption order or adapt an existing one. Otherwise you have to pay 25% withholding tax on the income. At many banks, you can easily issue the exemption order online.
Our tip: If you want to invest a larger amount, it is better to split the amount into several savings bonds with different terms. In this way you remain more flexible and can react to interest rate trends.
Can I also cancel a savings bond?
Early termination is not possible with this investment. If you invest money in a savings bond, you must therefore be sure in advance that you will be able to waive this amount until the end of the term. You can only make use of your right of withdrawal within 14 days of completion.
Even in the event of death, there is no automatic special right of termination for relatives, unless this has been contractually agreed in advance. That means: heirs as legal successors are basically bound by the contracts concluded by the deceased and have to wait for the money until the end of the regular term.
In an emergency, you can also borrow a savings bond
However, if there is an acute need for money, it is at least possible to borrow money from the savings bond. The bank will then offer you a loan if, in return, the savings bond is assigned as security. At the end of the term, the loan is then repaid with the capital of the savings bond that has become available. However, the interest on the loan is usually significantly higher than the interest on the savings bond.
In the past, savings bonds were issued as a certificate
Savings bonds were first issued in Germany in the 1960s. The principle of the savings bond certificate dates back to this time: In the traditional form, after buying a savings bond, you receive a certificate in which it is documented that the bank will pay you a certain amount on a certain day. The following data is noted on the certificate:
- The face value, i.e. the amount invested or paid out
- The day of the payout
- The amount of interest
- The type of interest
- Information on the transfer or assignment, whereby there are very strict clauses
Lost savings bond - what to do?
Perhaps you also have a certificate from an old savings bond with a very long term. Of course, it can happen that it is stolen from you or that it is lost when you move, for example. Don't worry, your money is not lost with it. But you should act immediately: contact the bank as soon as possible to inform them of the loss. The document is then declared invalid, which prevents abuse. To do this, you must apply to your local district court for what is known as a public notice procedure. If you do not have a copy or a transcript, you must at least provide the main contents of the paper. If the savings bond has been declared invalid, you can apply to your bank to have the certificate reissued.
Today savings bonds are managed digitally
Nowadays, when banking is increasingly being done digitally, the savings bond in the form of a paper certificate probably seems rather old-fashioned to you. In fact, more and more banks are seeing it that way and are switching to purely digital transactions via online banking for savings bonds. When purchasing a savings bond using the online form or by phone, you will then simply receive an order confirmation by email. At the end of the term, the money will be automatically transferred to your reference account. Some institutes stick to the paper form, but only issue a depository receipt instead of the certificate. This will certify that you have bought the savings bond.
Saving sustainably with the eco savings bond
Although the selection of savings bonds has now decreased significantly overall, we do not want to withhold a special form with a double value proposition from you: Eco savings bonds are characterized by the fact that your invested capital is invested in the financing of environmental projects. These can be, for example, photovoltaic or wind power plants, the energetic renovation of buildings or environmental loans that are required for soil protection or wastewater treatment.
What interest can I expect on the eco savings bond?
For example, Sparkasse Fürstenfeldbruck is currently offering such an eco-savings bond. The term is set at 6 years, the interest rate is 0.20% (as of January 2020). The Sparkasse Hannover also offers an eco-savings bond with which sustainable projects in the region are promoted.Here you get an average return of 0.15% with a term of 5 years (as of January 2020). Since the interest rates on the eco-savings bond are very low, it is more of a product for enthusiasts for investors who are not only looking for financial growth in value.
If you first have to open a call money account as a reference account when purchasing a savings bond, you can use this to your financial advantage. For new customers, some banks often offer special interest rates on overnight money for a few months. Then it is worthwhile to first invest the money in a call money account for the duration of the campaign and only then convert it into a savings bond.
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