As NS&I reduces its savings rates, James looks at where next for their savers
19/02/2020
On Monday, National Savings & Investments (NS&I) announced sweeping rate reductions across a large number of its savings products, including Premium Bonds, which will come in with effect from 1st May 2020.
It’s particularly significant as around 25 million savers have savings with NS&I worth £167bn. Many people are attracted to them because of their unique position in the market. When savers invest with NS&I, they are lending direct to the Government and therefore there is 100% security on all savings balances held with them.
Why has NS&I cut its rates?
NS&I is in a difficult position as it has funding targets set by the Government and in effect has to compete against other forms of finance through which the Government can raise money, such as gilt-edged securities, known as gilts. As gilt yields are at all-time lows, the government can raise money more cheaply from those than it can from NS&I. It’s likely that NS&I didn’t want to make these reductions but needs to as its funding looks expensive compared to gilts.
While I recognise the need for NS&I to manage their funding costs for the Treasury, and their competitive position, the vast majority of its current interest rates are nowhere near the best buys in the market. Therefore, reducing interest rates by up to 40% feels savage in these circumstances. Although interest rates on savings accounts are at historic lows, there are significantly better deals on offer in the market for savers with banks that have full Financial Services Compensation Scheme protection.
Where next for savers?
I’m going to look at each of the three product types that NS&I has cut - variable rate savings, fixed rate savings and Premium Bonds - and give my thoughts on what savers with those accounts should do, in light of the changes.
Variable Rate Savings
|
Product |
Current rate |
Interest rate from 1 May 2020 (change in brackets) |
|
Direct Saver |
1.00% gross/AER |
0.70% gross/AER (-30 basis points) |
|
Investment Account |
0.80% gross/AER |
0.60% gross/AER (-20 basis points) |
|
Income Bonds |
1.15% gross / 1.16% AER |
0.70% gross / 0.70% AER (-45 basis points) |
Of all the cuts, the reductions on variable rate savings seem particularly savage. With the best buy easy access account paying 1.31%, and several providers offering 1.20% - 1.30%, culling rates by 25% – 40% on already uncompetitive accounts seems very harsh on savers.
Savings Guru verdict
I’d recommend NS&I savers look at Virgin Money’s double take e-saver paying 1.31%, Britannia’s Select Access saver offering 1.30% or Marcus’ Online Savings account, which also pays 1.30%.
Fixed Rate Savings
|
Product |
Current rate |
Interest rate from 1 May 2020 (change in brackets) |
|
Guaranteed Growth Bonds (1-year) |
1.25% gross/AER |
1.10% gross/AER (-15 basis points) |
|
Guaranteed Growth Bonds (2-year) |
1.45% gross/AER |
1.20% gross/AER (-25 basis points) |
|
Guaranteed Growth Bonds (3-year) |
1.70% gross/AER |
1.30% gross/AER (-40 basis points) |
|
Guaranteed Growth Bonds (5-year) |
2.00% gross/AER |
1.65% gross/AER (-35 basis points) |
|
Guaranteed Income Bonds (1-year) |
1.20% gross / 1.21% AER |
1.05% gross / 1.06% AER (-15 basis points) |
|
Guaranteed Income Bonds (2-year) |
1.40% gross / 1.41% AER |
1.15% gross / 1.16% AER (-25 basis points) |
|
Guaranteed Income Bonds (3-year) |
1.65% gross / 1.66% AER |
1.25% gross / 1.26% AER (-40 basis points) |
|
Guaranteed Income Bonds (5-year) |
1.95% gross / 1.97% AER |
1.60% gross / 1.61% AER (-35 basis points) |
|
Fixed Interest Savings Certificates (2-year) |
1.30% tax-free/AER |
1.15% tax-free/AER (-15 basis points) |
|
Fixed Interest Savings Certificates (5-year) |
1.90% tax-free/AER |
1.60% tax-free/AER (-30 basis points) |
Fixed rate savings have also had significant cuts, albeit slightly more understandably. NS&I’s five-year products are creeping up towards the top of the best buys. However, their shorter terms weren’t in danger of troubling the tables any time soon.
Savings Guru verdict
While I cannot recommend locking away savings for five years at current market rates, NS&I’s five-year Guaranteed Growth Bond and Fixed Interest Savings Certificates are very competitive. These products are not on general sale; they are only available to existing holders who have maturing products which they can reinvest into further bonds/certificates. If you are a saver with these products maturing before 1st May, the five-year options are worth consideration, before these rates are withdrawn.
Otherwise, I’d recommend savers look at Atom Bank (1.65% and 1.80%) for 1 Year and 2 Year, BLME (1.85%) or Atom (1.80%) for 3 Year and Gatehouse (2.10%) or Aldermore (2%) for 5 Year.
Premium Bonds
|
Current prize fund rate |
Current odds |
New prize fund rate (from 1 May 2020) |
New odds (from 1 May 2020) |
|
1.40% tax-free |
24,500 to 1 |
1.30% tax free |
26,000 to 1 |
In light of the other large cuts, the biggest surprise was that the prize fund rate on Premium Bonds was only reduced by 0.10%. Given that the top easy access rates range from 1.20% - 1.31%, and have been falling steadily, NS&I could find that the Premium Bonds prize fund pays above the best buy easy access savings account by the time this cut comes into effect on 1st May.
Savings Guru verdict
I’m a big fan of Premium Bonds as an alternative to the National Lottery and they are NS&I’s most popular product. I don’t see any reason for holders to move their money, purely based on the rate reduction.