Secure Your Savings with RSA Retail Savings Bonds: Guaranteed Returns with Low Risk

Secure Your Savings with RSA Retail Savings Bonds: Guaranteed Returns with Low Risk

Bonds is an asset class generally avoided by the retail market. Many variables determine its price and you need to be aware of these as an investor. To make these bonds accessible and easy to use, the government introduced RSA retail savings bonds, also known as government retail bonds, which are a popular investment option in South Africa. 

These bonds are issued by the government and are a low-risk, fixed-income investment option that can be purchased by individual investors. RSA retail savings bonds come in different denominations and maturity periods. The denominations range from as low as R1,000 (R500 with the top up bonds) to as high as R5,000,000. The maturity periods range from 2 to 10 years, giving investors flexibility in choosing a bond that suits their investment objectives and financial goals.

How RSA retail savings bond work

When you purchase an RSA Retail Savings Bond, you are essentially loaning money to the South African government. The government pays you interest semi-annually on 31 March and 30th September on your investment at a fixed rate, which is set at the time of purchase and remains the same throughout the life of the bond. On application the investor can choose to have their interest paid monthly. The interest rate will vary depending on the type of bond and the term length you choose. At the end of the term you receive your initial (principal) capital back.

Are RSA retail savings bond a good investment 

One of the key benefits of investing in RSA retail savings bonds is the low risk associated with them. Since these bonds are issued by the government, they are considered to be one of the safest investment options available in the market. 

RSA retail bonds also offer a fixed rate of return, which means that investors know exactly how much they will earn on their investment. The interest rates offered on these bonds are typically higher than those offered by savings accounts, making them a popular investment choice for individuals looking to earn a higher return on their savings.

Another advantage of investing in RSA retail bonds is the ease of access. These bonds can be purchased online through the National Treasurys RSA Retail Savings Bonds website, which makes it easy for investors to manage their investments from the comfort of their own homes.

A serious concern for me was investing in RSA retail savings bonds and the rate increase on bonds. To overcome this you can restart your fixed rate RSA retail savings bond at a new prevailing interest rate, after twelve months being invested.

Risk of investing in RSA retail bond

Inflation risk: The risk that the purchasing power of your investment returns will be eroded over time due to a rise in the general price level of goods and services. As a bond investor, inflation risk is a significant consideration because the interest payments you receive on your bonds may not keep up with inflation, and the value of your principal investment may also decrease in real terms. 

Government's ability to repay the debt: If the government defaults on interest and principal payments, means you won't receive your growth or principle back. As the government owns the printing press, they will not default on your investment but the value of your principal investment can be worth much less in periods of high inflation caused by printing money.

In terms of taxation: Interest earned on RSA retail bonds is subject to income tax. Which is the highest taxable rate in South Africa. Annual exclusion of R23 800 (under age 65) R34 500 (older than 65) will apply.

Low liquidity: Investors are discouraged from withdrawing and can only withdraw after 12 months. A penalty will be applied to the withdrawal. They may not be suitable for individuals who may need to access their funds in the short term.

RSA retail savings bond investment options

When investing in RSA retail bonds, its important to consider the investment objectives and risk tolerance of the individual. Its also important to research the different bond options available and compare the interest rates offered by each option.

Investing in RSA retail savings bonds is a good option for individuals looking for a low-risk, fixed-income investment. However, its important to note that these bonds may not offer the same level of returns as other investment options such as stocks or real estate. One of the challenges with RSA retail bonds is that they are not very liquid, meaning that they cannot be easily sold before maturity. This makes them more suitable for long-term investors who are looking to earn a fixed rate of return over a specified period.

Your financial advisor might not mention these options to you as they are not remunerated for giving RSA retail savings bond advice. These are your RSA retail savings bond options:

Fixed rate retail savings bond: The Fixed Rate RSA Retail Savings Bonds earn a market-related fixed interest rate, which is priced off the current government bond yield curve, and is payable on the interest payment dates until maturity.

Inflation linked retail savings bond: The capital amount is inflation adjusted semi-annually on the interest payment dates until maturity. A fixed interest rate is applicable, derived from the government inflation linked bond yield curve. The interest is payable until maturity.

RSA retails savings top up bond: The minimum initial capital amount that may be invested in the RSA Retail Savings Top Up Bonds is R500.00 and the minimum amount that the account may be topped up with at a time is R100.00. The RSA retail savings top up bond was created to include lower income investors. 

Summary: 

In conclusion, RSA retail savings bonds are a popular investment option in South Africa that offer a low-risk, fixed-income return. While they may not offer the same level of returns as other investment options, they are a good choice for individuals looking for a stable investment that can help them meet their financial goals. With the recent changes to bond options and investment minimums, investing in RSA retail savings bonds has become more accessible and attractive to individual investors.

Article was originally published on 23 Feb 2023. Rates changes must be adapted.

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