• NS&I will cut interest rates on £136 billion of variable rate products on 24th November, with virtually nil interest being paid on £24.6 billion of savers’ cash
• Savers can earn up to £370 more a year on £50k by switching to the current best buy
• Tips for savers in NS&I products facing cuts
Laith Khalaf, financial analyst at AJ Bell
“Another blow to savers is waiting in the wings as NS&I is poised to slash rates across its product range. Since lockdown, NS&I has taken in more money than in the previous three years combined, so it’s cutting rates to stop savers charging down the door.
“The cuts are likely to have a ripple effect on savings rates across the market, as banks and building societies won’t have to offer quite as much interest to compete with NS&I. When a big player like NS&I cuts rates so drastically it can therefore be expected to affect savers across the board.
“The best course of action if you’re an NS&I saver depends on which kinds of product you’ve got and how much you value the security of having your money backed by the Treasury. In terms of security, it’s worth bearing in mind that the Financial Services Compensation Scheme covers up to £85,000 of losses per person in the unlikely event of their bank going bust.
“NS&I also offers tax-free accounts in the form of Premium Bonds and Fixed Interest Saving Certificates. For anyone who has used up their personal savings allowance, the interest paid by these products is actually worth more than a standard account paying the same rate because of the tax break. NS&I also offers cash ISAs and Junior ISAs, which are tax-free, but so are the accounts of rival ISA providers so like-for-like rate comparison is more straightforward.
“As ever, savers need to do what they can to eek out the best return from their money by shopping around and considering locking away some of their cash in fixed term bonds to pick up better rates. For money that can be tucked away for even longer, a minimum of 5 to 10 years, an investment in the stock market is worth considering. The current yield on the FTSE 100 is 3.4%, and with the potential for capital growth that looks like a more attractive option than cash for long term investors.”
NS&I rate comparison
“NS&I is drastically cutting interest rates on the six variable rate, easy access products in the table below which made up around £136 billion of the money held with NS&I as at 31st March 2020. £24.6 billion of cash is held in Income Bonds (£21.8 billion) and the Investment Account (£2.8 billion), where rates are being cut to virtually nil.
|
Current NS&I AER |
New NS&I AER |
Moneyfacts best buy |
Extra annual interest switching to best buy on £50k |
|
|
Direct Saver |
1% |
0.15% |
0.75% |
£300 |
|
Investment Account |
0.80% |
0.01% |
0.75% |
£370 |
|
Income Bonds |
1.16% |
0.01% |
0.75% |
£370 |
|
Direct ISA |
0.90% |
0.10% |
0.65% |
£275 |
|
Junior ISA |
3.25% |
1.50% |
2.95% |
£145 (based on £10k) |
|
Premium Bonds |
1.40% |
1% |
0.75% |
-£125 |
Sources: NS&I, Moneyfacts best buy as at 16/11/2020. Current NS&I rates effective until 24th November 2020, when new rates become effective. For Premium Bonds the new rate becomes effective from the December monthly draw.
“Premium Bonds will still offer a highly competitive rate, but of course interest is not shared equally, and you could get more or less depending on how lucky you are. For the other variable rate easy access products, savers can now get more annual interest by moving their cash elsewhere.
“Indeed that is the purpose of the interest rate cuts, to reduce inflows and encourage outflows, to keep NS&I within its financing target for this financial year (which runs from April). The Treasury increased that target from £6 billion to £35 billion in July, because the government needed to borrow more money to fight the pandemic.
“So far since the start of its financial year, NS&I has taken in £38.3 billion, so it’s already above target with four months, and ISA season, left to go. The Treasury target has £5 billion of leeway, so the absolute maximum NS&I can take on is £40 billion though it is possible the Treasury may increase the target again. While the rate cuts are bad for savers they reduce the interest the Treasury has to pay to borrow the cash which makes tapping this source of finance more attractive.
“As well as cuts to the variable rate products, NS&I is also cutting rates on a range of fixed term products, specifically Guaranteed Income Bonds, Guaranteed Growth Bonds and Fixed Interest Saving Certificates. The cuts will be effective from 24th November where a customer’s product matures and is rolled over, but until maturity savers still get their existing rate, which is locked in for the whole period.”
Tips for savers in NS&I products facing cuts
Direct saver, Investment Account, Income Bonds, Direct ISA, Junior ISAs. NS&I will now be offering significantly lower interest on these accounts, and savers can get more interest by switching to another provider. These accounts are still being offered by NS&I, so should NS&I increase its rates in future, it’s possible to switch back.
For savers switching their ISA and Junior ISA accounts to new providers it’s important to do this as part of an ISA transfer process. This is a straightforward case of making an ISA transfer application to your new provider of choice, they will then contact NS&I and arrange for the cash to be sent across.
DO NOT encash the ISA yourself and send the cash to a new provider. If you do this you will lose the existing ISA wrapper, and will have to use up some of this year’s allowance to put it back into a tax shelter.
Premium Bonds. There’s a hefty cut to the interest rate on the Premium Bond prize pool, but it will still remain higher than the Moneyfacts best buy for easy access accounts right now. On top of that it’s tax-free so anyone who’s used up their personal savings allowance would actually need to get an even higher rate from a standard taxable account to match the post-tax interest from Premium Bonds, as below.
|
New Premium Bond rate |
Equivalent taxable rate required for taxpayers on |
Best buy* |
||
|
Basic rate |
Higher rate |
Additional rate |
||
|
1% |
1.25% |
1.67% |
1.82% |
0.75% |
*Moneyfacts easy access best buy 16/11/2020
Unlike a traditional savings account of course, Premium Bond interest is not distributed evenly, so you may get more or less than the interest rate applied to the prize pool, depending how lucky you are. Indeed that is part of the appeal of Premium Bonds, particularly when interest rates are so low everywhere - there’s a small chance you might get a humungous return on your investment by winning one of the big prizes, including two £1million jackpots each month.
While Premium Bond holders won’t exactly be happy about the rate cut, they’re still getting a good deal compared to the rest of the savings market. So if they continue to be happy with the random element of prize-giving, they should probably stay put. The exception would be if they no longer need access to the money right now, and think they would like to tuck it away for the long term, in which case they should consider investing in the stock market (see below).
Guaranteed Growth Bonds and Guaranteed Income Bonds. Things get a bit trickier with these fixed term bonds because they are no longer on sale. So if you switch out to a new provider, there’s no going back in future if NS&I rates improve. It’s possible at some point in the future NS&I may offer these products again, but that’s not on the cards right now. You don’t have to make a decision until your particular product matures, which may potentially be months or years from now, at which point rates may well have changed so it’s a question of crossing that bridge when you come to it.
For those products maturing in the immediate future, NS&I’s rate cuts reduce the interest well below the best available on the market. You might stick with NS&I if you think it will be a best buy in future, but there’s a hefty question mark there. In the meantime you’re losing out on the extra interest you could get by switching out. The longer you are locking it away for, the greater the cost of doing so.
NS&I is backed by the Treasury, so it can offer security for savers with large cash holdings who are worried about breaching the £85,000 FSCS compensation limit (see ‘other considerations’ below). This is another reason savers may wish to stay put. Though if you have this much cash on hand you may wish to consider whether it may be better employed over the long term in the stock market.
|
Current NS&I AER |
New NS&I AER |
Moneyfacts best buy |
|
|
Guaranteed growth bonds 1 year |
1.10% |
0.10% |
1.08% |
|
Guaranteed growth bonds 2 year |
1.20% |
0.15% |
1.26% |
|
Guaranteed growth bonds 3 year |
1.30% |
0.40% |
1.42% |
|
Guaranteed growth bonds 5 year |
1.65% |
0.55% |
1.50% |
|
Guaranteed income bonds 1 year |
1.06% |
0.06% |
1.08% |
|
Guaranteed income bonds 2 year |
1.16% |
0.11% |
1.26% |
|
Guaranteed income bonds 3 year |
1.26% |
0.36% |
1.42% |
|
Guaranteed income bonds 5 year |
1.61% |
0.51% |
1.50% |
|
Fixed Interest Savings Certificates 2 Year |
1.15% |
0.10% |
1.26% |
|
Fixed Interest Savings Certificates 5 Year |
1.60% |
0.50% |
1.50% |
Sources: NS&I, Moneyfacts best buy as at 16/11/2020. Current NS&I rates effective until 24th November 2020 when new rates become effective.
Fixed Interest Savings Certificates. Even more difficult choices face savers with Fixed Interest Saving Certificates which mature shortly. These fixed term bonds are no longer on sale, so the same considerations apply as with Guaranteed Growth bonds and Guaranteed Income bonds.
But an added complication is the interest from these certificates is tax-free. As with Premium Bonds, that makes them more attractive for those who have exhausted their personal savings allowance. However, unlike Premium Bonds, after taking this tax perk into account, the certificates still do not match the best buy (see table below).
BUT (and it’s a big but), because these products are no longer available, if you switch out, you lose the tax benefits for good. This leaves savers between a rock and a hard place. Much depends on your tax situation, and how much you value the tax shelter.
If savers in these products have some spare ISA allowance which they won’t otherwise use, then there is the possibility of cashing in the Fixed Interest Savings Certificates and putting the money straight into another tax shelter paying better rates of interest. For comparison, the best 2 year bond ISA currently offers interest of 0.8% and the best 5 year bond ISA offers interest of 1.15% (source: Moneyfacts).
|
Fixed Interest Savings Certificates |
Equivalent taxable rate required for taxpayers on |
Best buy* |
|||
|
Basic rate |
Higher rate |
Additional rate |
|||
|
2 year |
0.1% |
0.13% |
0.17% |
0.18% |
1.26% |
|
5 year |
0.5% |
0.63% |
0.83% |
0.91% |
1.50% |
*Moneyfacts fixed term bonds best buy 16/11/2021
Other considerations
Security. NS&I savings are backed by the Treasury, which means in theory they are about as safe as you can get, unless the UK government defaults on its obligations. This is in contrast to money held with banks and building societies where compensation for bankruptcy would be limited to the FSCS cap of £85,000 per individual per institution.
In practice the regulatory framework has been tightened hugely since the financial crisis, which should prevent banks getting into difficulties, and even if they do, customer deposits should be safe. But there is an element of even greater security with NS&I because of its explicit government guarantee.
For savers who can spread their eggs between various UK banks and building societies up to the FSCS limit £85,000 in each, default risk is less of a concern, so it will only be a compelling factor for extremely wealthy individuals. Savers holding such large amounts of cash should consider if it could be more productively invested in the stock market.
Long term investment. Cash products like NS&I are great for holding money you might need in a jiffy, because the capital value doesn’t fluctuate. Over the longer term, inflation is a big risk however, particularly with interest rates so low, which means your money can actually lose its buying power.
Savers should generally seek to have up to six months of expenditure in cash to cover any periods of unexpected unemployment. For longer term money, a minimum of five to ten years, savers should consider investing in the stock market, to harvest bigger long run returns. Clearly the stock market is riskier, and choppier, but the longer you leave your investment, the greater the chance of beating cash, and inflation.
