July magazine column

15/07/2021

Good News for Premium Bond holders

In last month’s column, I wrote about the risk of a rate reduction to the prize pool for Premium Bonds.  Since then, NS&I have reported their annual results and the good news is that there was no announcement of rate cuts.  Further good news came with July’s draw results which showed that growth in Premium Bonds had slowed to £1.1bn, from the previous month, whereas previous months have seen growth of circa £1.5bn - £2bn per month.

While the risk of a prize pool cut hasn’t gone away, the good news for holders (there’s over £110bn saved in them now!) is that, if this trend continues, it will reduce the likelihood for the need for a cut and certainly delay its implementation.  I don’t see any changes being announced until September at the earliest, which is what I predicted ahead of these results.

Rising interest rates on savings

Elsewhere, there’s more good news for savers as rates continue to increase in the savings market.  Last month, only app only Atom Bank paid 0.50% on easy access.  Now, although they’ve reduced their rate to 0.35% for new customers, Charter Savings, Coventry Building Society and Marcus are all paying 0.50% now.

Marcus have achieved this rate by adding a 12-month bonus of 0.10% to its 0.40% rate.  This is automatically applied to new customers, but existing customers need to log in to their account and apply the bonus.  If you are one of their 700,000 existing savers, log in to your account, click ‘view’ and then in the bottom right-hand corner, under ‘Bonus rates’ select ‘Review your savings’ where you can add the 0.10% bonus.

Fixed Rate Bonds have also seen sharp increases in rates since I wrote last month’s column.  Then, 0.85% was the best 1 Year Rate whereas now 1.10% is and six banks are paying 1% or more.

2 Year Fixed is up by 0.11% in the past month with a best buy rate now of 1.21% and the top 5 Year Fixed is up by the same amount to 1.66%.

The big question is - will the increases continue?  My view is that I think 1 Year rates will hold around here – we’ve already seen UBL and Zopa cut their rates which were 1.06% - but that we may see longer term rates increase by a few basis points.  Part of the reason for this is that we are seeing big shifts in ISA interest rates, and I believe we are seeing banks increasing rates here, to attract savers, rather than continuing to fuel further increases in fixed rate bonds.

ISAs on the rise

The first week of July has seen significant movements on ISAs with eight different providers either launching new rates or increasing existing rates.  This has pushed fixed rates up across the board and I think there is more to come.

ISAs typically have lower rates than their fixed rate bond counterparts.  This is for several reasons.  Firstly, they are more costly to administer for providers.  Secondly, banks must allow breakages (although they can charge penalty interest to grant access) and this means that this way of funding isn’t as good as fixed rate bonds, which are not breakable ordinarily.  Thirdly, there’s less competition for ISAs as new entrant banks don’t always offer them.  New entrants have been the best payers in recent years, but they typically launch fixed rate bonds, notice accounts and easy access before looking at ISAs.

However, the differential between fixed rate bonds and ISAs is too stark now and I think that’s why we are seeing a shift from banks to increase ISA rates as this is now better value for them.  For example, the best 1 Year Fixed is 1.10% whereas the best 1 Year ISA is 0.65%.  At these levels, I believe that gap should be around 0.25% - 0.30% so I expect we will see 1 Year ISAs above 0.70% soon.  Similarly, I’d be surprised if 2 Year ISA rates don’t top 0.90% by the end of the month too.

My advice to ISA savers is to watch the market closely but expect better rates to come later this month.