This month saw National Savings and Investments (NS&I) reduce the interest rates on a number of its accounts, including the rate paid on the popular Premium Bonds prize fund, raising the question on whether NS&I is losing its appeal?
National Savings has been the saver's stable for longer than we can remember, offering some competitive and interesting products, coupled with its unique 100% government-backed protection.
Products, including Premium Bonds and Index Linked Certificates have been hugely popular, with nothing really like them available anywhere else, but now savers are asking themselves if it's still worth holding on to NS&I products at all.
In the last tax year (2015/16), NS&I were set a target by the government to raise around £10 billion from savers which they comfortably managed, but for this year it's been reduced to £6 billion. As a result, NS&I needs to make its products less appealing to stem the flow of new funds and possibly encourage some savers to withdraw money.
Therefore NS&I announced back in March the following changes:
- Direct ISA went from 1.25% tax-free/AER to 1% tax-free/AER from 6 June 2016
- Direct Saver went from 1.10% gross/AER to 0.80% gross/AER from 6 June 2016
- Income Bonds went from 1.25% gross (1.26% AER) to 1% gross/AER from 6 June 2016
- Investment Account is going from 0.75% gross/AER to 0.45% gross/AER from 1 July 2016
The cut to the Direct ISA is the second 0.25% cut in recent times, dropping from 1.50% on 16th November 2015.
And the Investment Account is being chopped by 40% to a most uncompetitive 0.45%.
In addition, NS&I has reduced the interest paid on the premium bond prize fund – meaning that there is over £4.5 million less to be paid out in prizes – reducing the odds of winning a prize from 26,000 to 1, to 30,000 to 1.
Premium Bonds still remain popular however, as savers seem to be more captivated by the idea of winning a prize over simply earning interest. And however unlikely, that prize just might be £1 million.
The Index Linked Certificates, for those with maturing investments only, took a hit back in March reducing to just 0.01% + RPI (from 0.05%) for those looking to reinvest. So it's no surprise that so many of you are asking us if they're even worth reinvesting in any more.
This poses a really tough question as these accounts offer a tax free return and are guaranteed to at least match inflation, as measured by the Retail Prices Index.
Over the last few years however Index Linked Certificates have become less appealing, due to both a fall in the rate of inflation and also the rate paid in addition to RPI, although you could say that savings rates in general have also fallen heavily.
Having said this, currently a normal savings account could offer a better rate when compared to the current return from Index Linked Certificates. But as we don’t know what will happen to inflation in the future, especially given uncertainty around the EU Referendum, its a hard one to call on whether to turn you back on them completely.
Looking at inflation today, in simple terms you can find a better rate from a standard savings account and especially from high interest paying current accounts, but over the longer term you need a crystal ball to know the best route. And a key thing to bear in mind is that if you choose not to reinvest, you could miss out in the future should inflation rise and/or rates improve on future issues.
At the moment Index Linked Certificates are not on general sale and have not been for quite some time. If they continue to remain off-sale, you may regret letting them go, especially if you are a higher rate taxpayer.
As with all NS&I accounts, customers enjoy the benefit of 100% protection of ALL the money they place because of the HM Treasury Guarantee, but in most cases better rates can be found elsewhere and you can still benefit from the Financial Services Compensation Scheme protection of £75,000 per person, per banking licence.
Call one of our savings experts on 0800 321 3581 to see how you can improve the interest you're earning and keep your savings safe.