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.
Please Note: 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.