NS&I give with one hand and take with another

27th April 2017

Following the launch of its long awaited market leading 3 year fixed rate Investment Guaranteed Growth Bond earlier this month, next month National Savings & Investments (NS&I) will be reducing the interest rates on a selection of its variable rate savings accounts, including a reduction to the prize fund rate on its popular Premium Bonds.

The Investment Guaranteed Growth Bond offers a market leading 2.20% AER fixed for three years on a maximum of £3,000. You can download our free factsheet for the full details or feel free to give us a call to chat through the account conditions with one of our savings experts.

In what feels like give and take from NS&I, from 1 May the Direct ISA will reduce to 0.75% tax-free/AER from 1%, the Direct Saver will reduce to 0.70% tax-free/AER from 0.80% and the Income Bonds will reduce to 0.75% gross/AER from 1%.

Clearly disappointing news for stalwarts of this Government-backed British institution, as it remains popular with its unique 100% guarantee of all funds held, regardless of the balance. The good news is that there are better alternatives available elsewhere, although the protection would be limited to £85,000 through the Financial Services Compensation Scheme (FSCS) or €100,000 through an equivalent European scheme. For example, if you’re looking for a simple easy account you can get a significantly higher rate of 1.10% from RCI Bank UK. If you looking for an alternative cash ISA, when the Direct ISA reduces, the Post Office offers a higher paying alternative at 1.01% tax free/AER (albeit it with a 0.76% fixed bonus for 12 months). So, you don’t have to accept a reduction in your rate.

Premium Bonds are harder to compare as there simply is no other product on the market that is the same. In fact they’re more akin to a lottery than they are a savings account, as the return you earn is down to luck rather than judgement. Although you don't lose your deposit.

The Premium Bond prize fund rate is dropping to 1.15% tax-free from 1.25% tax-free. This is the rate that applies to the deposits into Premium Bonds and therefore determines how much is distributed in prizes. Whilst this means that there is less to be distributed, the number of £25 prizes available is actually increasing, therefore Premium Bond holders may actually be just as likely to win a prize as before, albeit a smaller one. The number of prizes on offer each month will be approximately 2,219,493 rather than 2,224,513 - so an expected reduction of just 5,020 prizes in total (the odds of winning remain at 30,000 to 1). However, there will be about 100,000 more £25 prizes, at the expense of some larger prizes, in particular the number of £100 and £50 prizes on offer. The number of £1m jackpot prizes will remain the same at two per month.

The bottom line is that whilst interest rates on savings accounts are so low, many people will feel that it's worth risking the possibility of winning nothing for the chance of winning the jackpot, however unlikely. Having said this, whilst waiting for a jackpot that is extremely unlikely to ever be won, they could do okay by earning just a few small prizes each year. And as the prizes are tax free, any prize is more valuable to those who pay tax on their savings.
 
Obviously it's disappointing that the rates on these accounts are reducing but is it likely to dampen appetite from loyal savers?
 
If you need any help looking for an alternative or would like to discuss your savings in more detail, please get in touch on 0800 321 3581, we’d love to hear from you.

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