From 1st May 2019, NS&I will launch new issues of its one and three year Guaranteed Income Bonds and Guaranteed Growth Bonds. But just how do these differ from the current issues?
The rates and maximum deposit of £10,000 per person, per issue will remain the same, but there will be changes to the Terms & Conditions regarding access to the money within the term of the accounts.
Here are some key questions that we are often asked about these accounts.
Can I access my cash before the bond matures?
The T&Cs of the current issues of the bonds (3 year bond issue 58 and 1 year bond issue 63) state that after the investment has been made, a customer can withdraw their funds early but NS&I will deduct a penalty equivalent to 90 days’ interest on the amount withdrawn.
But the Terms and Conditions have changed for the new accounts. From 1 May 2019, customers who invest in new Issues of Guaranteed Growth Bonds and Guaranteed Income Bonds will have a 30-day cooling off period at the start of the investment should they change their mind but will no longer have the option to withdraw their funds early.
As these new T&Cs only apply to the new issue, anyone who already holds one of the previous issues will still be able to gain access before maturity if they need it.
Can I take monthly or annual interest?
The Guaranteed Income Bonds will pay a fixed rate of interest to your bank account every month – there is no option to take the interest annually, even if you choose the three year bond.
The Guaranteed Growth Bonds will not pay out any interest before the maturity date – either monthly or annually. But that doesn’t mean that you are not effectively earning and being paid interest on an annual basis.
Rather than paying it out to you. NS&I adds the interest to your bond on each anniversary of the day you invested, so it grows in value each year. If you choose a term of more than one year, you will get the benefit of compound interest. This means that, from the second year onwards, your bond will also earn interest on the interest that was previously added, as well as on the original investment.
But what this also means is that you need to account for this interest payment each year, rather than just when the bond matures. So, if you pay tax on your savings interest, you will need to pay the tax due each year, even though you won’t physically receive the interest until the bond ends.
On the flip side, it also means that you don’t receive a much larger one-off interest payment at the end that could either push you into a higher tax bracket for the year and/or see you breach your Personal Savings Allowance.
What are interest rates being paid on the new issues, and how do these compare?
As mentioned above, the maximum deposit in these bonds is £10,000 per person, per issue. The maximum balance was much larger - £1m per person, per issue - until June last year, when they slashed the amount by 99 per cent.
And as the maximum is now within the FSCS limit of £85,000, there is no protection reason that anyone needs to remain with NS&I – and better rates can be found elsewhere.
The NS&I 1 Year Guaranteed Income Bond is paying 1.45% gross/1.46% AER – whereas the best monthly paying one year fixed rate bond available is with Metro Bank, paying 1.98% gross/2% AER
On a balance of £10,000, that means earning an extra £4.42 per month – or £53 more over the year.
Similarly, the 1 Year Guaranteed Growth Bond is paying 1.50% gross/AER, whereas, Sharia compliant provider BLME is paying 2.20% AER – or the above-mentioned Metro one year bond is paying 2% AER. BLME would provide an extra £70 a year – Metro Bank an extra £50 (on £10,000).
On the three year bonds, there is also more to be earned elsewhere.
The NS&I Guaranteed Income Bond is paying 1.90% gross/1.92% AER – whereas Aldermore is offering 2.37% gross/2.40% AER, so £3.92 more every month for three years.
Finally, the NS&I 3 Year Guaranteed Growth Bond is paying 1.95% gross/AER whereas you could earn 2.55% with Gatehouse Bank (another Sharia-compliant provider) or 2.40% with Aldermore.
When these NS&I Bonds could accept up to £1m, which was fully protected by HM Treasury and offered access within the term, there were reasons why these bonds could have been the best option. However, those benefits are no longer applicable, so savers should look to earn better rates elsewhere.
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