🔔 NS&I increases rates on a range of its savings accounts

Last week, NS&I announced increases to two of its key easy access accounts, the Direct Saver and the Income Bonds accounts. Both have increased to 0.50% - offering a very different picture to the rates seen by customers in November 2020 when the rates were cut from market leading to some of the worst on the market.

This is probably bittersweet news for NS&I savers, past and present. Those who simply left their money in these accounts when the rates fell so dramatically in November 2020 will no doubt be pleased, but those who struggled to get their money back after the rates fell to as little as 0.01%, are unlikely to be enticed back.

Although the new rates are competitive, better easy access accounts, paying over 0.70% AER can be found elsewhere and with inflation soaring, ever penny in additional interest earned is important to at least mitigate the damaging effect that the rapidly rising cost of living can have.

That said, at this new level, the accounts are bound to attract some savers back – especially those with more than the Financial Services Compensation Scheme protection limit of £85,000. NS&I customers enjoy unique protection, which means that ALL the money deposited with the state-owned bank is protected by HM Treasury. You can deposit up to £2m into the Direct Saver and £1m in the Income Bonds account, both of which offer easy access.

Every year, NS&I receives a target from the Government, of the amount of money it needs to raise from savers. We’ve yet to see the latest results indicating if NS&I is still well below its target, as it was towards the end of last year, but presumably it has not attracted as much from savers as it should have, otherwise it’s unlikely we would have seen these increases.

And Premium Bond holders are likely to be disappointed that they’ve not seen a rise to the interest rate on the prize fund, after it fell by 0.40% to 1% in December 2020, which saw the odds of winning a prize fall from 24,500 to 1, to 34,500 to 1.

New Green Savings Bonds launched too!

Following the increase to the easy access accounts, NS&I also launched a new issue of the Green Savings Bonds with an interest rate that is double that of Issue 1, which was launched at the end of October last year.

The Green Savings Bond is a 3-year Fixed Rate Bond, and according to NS&I “your savings will be contributing to green projects chosen by the Government”.

You can deposit up to £100,000 into this bond , but there is no early access. So those that did take out Issue 1 which was offering 0.65% AER for three years will be furious that this new issue is paying 1.30% AER fixed for three years. That said, you can earn as much as 1.92% in the wider market.

One thing you should be aware of is that, unlike the majority of fixed rate bonds, the interest you earn on Green Savings Bonds will count towards your taxable income in the tax year your Bond matures. So this could mean you will breach your Personal Savings Allowance (PSA) when the bond matures, when you wouldn’t ordinarily, as the interest is not being spread out over the term.

Let me give you an example which assumes the saver is a basic rate taxpayer and has no other savings accounts held elsewhere.

If you deposited £75,000 into a three-year bond paying 1.30% which pays interest annually – but you opted to roll that money over each year, as the interest is still deemed to have been received annually (even though you don’t physically get in until the maturity) you would receive gross interest of £975 in year 1, £987.68 in year 2 and £1,000.51 in the final year – just breaching the Personal Savings Allowance in that last year - both other years and subsequent interest amounts earned, are under the PSA – so there would be no tax liability.

However, with the Green Savings Bond, as the interest is counted only in the year of maturity, you can only deposit £25,310 without breaching the PSA as you’ll receive the total interest in one fell swoop – in this case £999.98.

Some savers will be eligible for the starting rate for savings, which means that you can earn an extra £5,000 in interest before it is liable for tax, however this only applies to those whose other income (so wages or pension income for example) does not exceed £17,570.

For more information on the starting rate for savings take a look at the information supplied by Gov.uk

Although NS&I says that the reason for the higher rate on this issue is because the savings market has changed, fixed rates have increased minimally since October last year – they have certainly not doubled, as in the case of this bond. We suspect that with the previous issue paying a measly 0.65% AER, NS&I was unable to raise as much as it wanted to for the Government’s green projects. For the environment's sake it would great to think that this bond will prove more popular