Laura Suter, head of personal finance at AJ Bell, comments on the new Green Savings Bonds from NS&I which go on sale from Friday 22 October 2021 with a three year fixed interest rate of 0.65%.
“All that hype for such a paltry rate, is definitely what some savers will be thinking after the announcement of the interest rate on the Government’s green savings bonds. But, in the words of Kermit the Frog, it’s not easy being green, and savers are discovering that there are payoffs to putting your money to good use. But having had to wait since March for the full details of the new bond, now they’re here it’s likely to go down like a lead balloon.
“Why would savers lock their money away for three years for the same interest rate they can currently get in an easy-access savings account? This equation makes even less sense now the nation is looking down the barrel of an interest rate rise from the Bank of England, which will lead to a hike in savings rates.
“Many had hoped that NS&I would leap to the top of the league tables with the new product and they could have a triple win: a great rate, a Government-backed product and putting their money to greener use, but that’s not the case. Instead the rate is not far off a third of the top-paying account on a three-year term*.
“However, the product will likely still appeal to some, who want to help fund the Government’s green projects and want the security of a Government-backed product. But they have to accept the pretty meaty payoff here. If someone invested £10,000 they’d generate £553 of interest with the top-paying three-year account over the entire term, while with the NS&I offering they’d get £196 – costing them more than £350 to save in a greener way**.
“The Government was always going to have a juggling act on its hands when setting the rate. Too low and it won’t attract enough customers to fund its green projects, but too high and many would question why it was paying so much to borrow money compared to raising money in the Gilt market. In the end it’s erred on the side of cheaper borrowing, presumably with the knowledge that it can increase the rate later if take-up is slow.
“Anyone signing up to a long-term fix needs to think carefully about what they think interest rates will do during that time. Many now expect a rate rise later this year and another next year, although this is by no means certain. But that would mean an uptick in savings rates too, in both the easy-access and fixed-rate market. If you lock money away now you’ll miss out on those potential increases.”
*based on Moneyfacts, top three-year account pays 1.81% from JN Bank and Al Rayan Bank.
**Assumes annual compounding of interest on both accounts.