Following the recent release of a 1-year bond exclusive to existing customers with bonds maturing, National Savings & Investments (NS&I) has now broadened its offering for new customers, to include 2-year and 5-year bonds, further expanding its product range.
NS&I has launched new 2-year and 5-year Guaranteed Growth and Guaranteed Income Bonds, offering them to new investors as well as existing, for the first time in 15 years. A new issue of the 3-year bond has also been announced – with a higher rate than the previous.
Are these new bonds competitive?
In a nutshell – yes, these are certainly competitive rates, especially when compared to the high street banks. However, better rates are available with some of the lesser-known banks – at the moment at least.
The following table shows these NS&I products compared to the best of the rest.
Rates correct at 13/08/2024
These are fixed-term savings bonds, which means the interest rate is fixed for the term, but it also means that you can only access the money when the bond matures, no earlier access is allowed except on the death of the account holder. This is the same with most fixed term bonds with other banks and building societies.
Something to be aware of with the NS&I Guaranteed Growth Bonds is that because there is no option to take an annual income, the interest is deemed to all be received in the year of maturity, even though it is added to the bond annually and compounded. This could be important because if all the interest is deemed to have been received in one year rather than spread over the term of the bond, it could mean a larger tax bill as you can’t spread the interest over the term of the bond and therefore utilise the Personal Savings Allowance (PSA) each year.
The PSA was introduced in April 2016 and it means that basic rate taxpayers can earn up to £1,000 per tax year, before they have to pay tax on the interest on their cash savings accounts. The PSA for higher rate taxpayers is £500 and additional rate taxpayers don’t receive a PSA.
However, you cannot roll over any unused PSA, so if you don’t earn £1,000 in savings interest in one year, but you earn more than the allowance in the following year, that’s tough luck. You’ll still owe tax on any interest over the allowance for that individual tax year.
For many customers, this may not have too much of an impact, especially if you are already using your PSA. But it’s important to be aware. And let’s not forget that for some, it could mean that they are pushed into a higher (or even worse, the highest) tax bracket for that year.
The Guaranteed Income Bonds offer a slightly lower “gross” interest rate, which determines the final amount of interest the saver will receive as the interest will be paid out monthly, so will not be compounded, but it means that you can use the PSA each year.
The monthly income gross rates are 5.03% for 1-year, 4.50% for 2-years, 4.26% for 3-years and 4.02% for 5-years.
Why has NS&I released these bonds?
The return of these bonds to the market, especially with such competitive rates, highlights NS&I’s dual focus on retention and growth. While the initial 1-year bond was likely a bid to keep existing customers within the fold, the introduction of 2-year and 5-year bonds to a broader audience shows an aggressive approach to achieving their financial objectives.
As a government department, each year NS&I is given a target of the amount of money it needs to raise – and for the current tax year this is £9 billion – give or take a leeway of £4 billion each way. Over the last two years they have overshot their target, which was £7.5 billion, with a leeway of £3m each way – by £1 billion each year. But this year, with a bigger target, they are underperforming. In the first quarter of the year, they have taken in £955 million, but they have also lost £315 million – so they have only raised a net amount of £640 million – way behind target!
Although the rates may not be the very best you can earn, NS&I is often considered the gold standard when it comes to protection of savings, and it's not hard to see why. As an institution, NS&I is unique because it is fully backed by HM Treasury. This government guarantee means that 100% of any money you invest with NS&I is safe, no matter how much you save. That said, other banks or building societies, are protected by the Financial Services Compensation Scheme (FSCS) up to a limit of ÂŁ85,000 per person per institution, so for those with less than ÂŁ85,000 or prepared to open multiple accounts, NS&I may not be the first choice.
The advent of cash savings platforms has also added another option for those with larger amounts of cash.
Think of a cash savings platform like a savings supermarket, where with a single application and log-in, you can pick and choose multiple competitive savings accounts - from easy access to fixed term bonds - and providers at the click of a button. Whilst not whole of market, cash platforms do make it easier to spread your cash, so that it can be better protected by the Financial Services Compensation Scheme (FSCS).
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