The ups and downs of National Savings.
National Savings is both reducing and increasing interest rates. But its real rate challenge lies ahead.
On 16 November 2015 National Savings & Investments (NS&I) cut the rate on its Direct Saver cash ISA from 1.50% to 1.25%.
The reduction meant that NS&I relinquished their position near the top of the instant access ISA league tables.
The move was not completely unexpected: NS&I do not normally aim to be chart-toppers as they rely heavily on the Treasury-backed security message rather than offering the best rate. Equally, NS&I have no great need to haul in money, given their success in fund-raising via the 65+ bonds in 2015.
Something that might also have encouraged NS&I’s action is the arrival this coming tax year of the personal savings allowance, which will allow basic rate taxpayers to earn £1,000 of interest tax-free and higher-rate taxpayers £500 (additional-rate taxpayers receive no allowance). Bank and building society accounts will pay interest gross from next April, obviating the need for a tax reclaim, so the appeal of the cash ISA will be much reduced.
In October 2015, NS&I took a step in the opposite direction and raised rates for its guaranteed income and growth bonds. These are not on public offer, but are available for re-investment by existing maturing bondholders. The rates are much more in line with the traditional market positioning of NS&I. Even after a 0.2% increase they can easily be beaten by shopping around.
A more challenging test for the NS&I rate setters is what they do from January 2016, when the one-year version of the 65+ bond starts to mature. This paid 2.8% – well above market rates then and now – and was widely seen as a pre-election offering to the part of the population most likely to vote. Together with a three-year version, in total the 65+ Bond raised over £13bn, a useful contribution to the government’s borrowing requirement.
Nearly half a million savers with one-year Pensioner Bonds will see the interest they earn drop from 2.8% to 1.45% when their fixed term ends unless they move their money, according to rollover rates published by NS&I. But you can get a much better rate elsewhere.
If therefore you are left with an unexciting NS&I reinvestment option, please do contact us to discuss the alternatives.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.