NS&I launches British Savings Bonds – reaction from AJ Bell’s Suter

by | Apr 3, 2024

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  • British Savings Bonds will have 4.15% interest
  • Income and Growth versions of the bond on offer
  • The rate is below the top three-year bond of 4.63%
  • You can invest up to £1 million, rather than the previous £10,000

Laura Suter, director of personal finance at AJ Bellcomments:

“The chancellor announced the launch of the new savings bonds in the Spring Budget, hoping to capitalise on some patriotism across the nation to raise some more money for the government. However, the bonds are a fancy bit of marketing and aren’t actually any different to putting your money in other NS&I products. Despite being branded as ‘British Savings Bonds’ the money will go into the general government coffers, in the same way as other money raised by NS&I.

“The government-backed provider has instead re-badged the previous Guaranteed Income and Guaranteed Growth bonds, issuing a three-year version of those accounts. A previous one-year version of the bonds that was launched last Autumn was so popular it sold out in just five weeks. However, those bonds came with a 6.2% interest rate on them that is far above this new offer. 

 
 

“The 4.15% interest rate on the British Savings Bonds is a long way from top of the tables, with 27 other providers offering three-year bonds with higher interest rates. It means you’re sacrificing returns in order to save with NS&I, so you need to weigh up whether that’s a sacrifice worth making. The top three-year bond is 4.63% from a handful of providers, meaning that if you had £5,000 to save you’d be giving up £24 a year of interest by sticking it in British Savings Bonds – or £2 a month. At the maximum savings of £1 million you’d be giving up £4,800 of interest a year. 

NS&I said it wanted to price these bonds so they’d stick around, rather than selling like hot cakes, and this middle-market offering may just do that. It’s tricky for NS&I to get the interest rate right on these products: too high and they’ll attract swathes of cash and have to pull the accounts from sale, too low and savers will go elsewhere, meaning NS&I will have to crank up the interest rate later.

This new launch effectively kills off the Green Savings Bond – which is the other three-year fixed rate bond from NS&I. The account funnels money into environmentally-friendly projects funded by the government, but it is only paying 2.95% interest. That means you’d have to be very passionate about green initiatives to opt for the Green Bond over the new British Savings Bond.”

 
 

Data based on Moneyfacts, accurate to 3 April 2024.

Things to consider before buying

You can’t withdraw your money early: Under previous versions of these bonds NS&I allowed people to exit the bonds early if they sacrificed some interest. But that’s no longer allowed, meaning that the money is tied up for the full three years with no option to exit early. 

 
 

You can invest up to £1 million: A few years ago NS&I restricted people to a maximum investment of £10,000 in the Guaranteed bonds, but it has extended this to £1 million for the British Savings Bonds. The minimum investment of £500 will remain, so if you have savings lower than this you can’t use the account.

Pick whether you want the interest now or later: If you pick the “Income Bond” version you’ll get the interest paid out each month into your bank account, meaning you can spend it. This is a good option if you need the income each month to live off – so ideal for retired people for example. However, if you don’t need the income pick the “Growth” option, which means the interest is rolled up and added to the bond each year.

Remember the tax bill: While NS&I’s Premium Bonds are tax-free, these bonds aren’t. It means that you could pay tax on the interest you earn. The Personal Savings Allowance gives most people a tax-free limit for the interest they can earn on their savings before they’re taxed. It currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional rate taxpayers get no tax-free allowance. It means that once you breach the limit you’ll pay tax on the interest at your income tax rate. If you’re likely to face a tax bill for the interest you might want to weigh up whether an ISA would be better for your cash savings.

NS&I is government-backed, but do you need that? A big appeal of NS&I is that they are backed by the government, so they are seen as the safest place to keep your money. However, other banks and building societies are protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with NS&I. But regardless some people will feel much safer with their savings being with the government. Plus anyone with a large amount of savings may prefer to put their money with NS&I rather than split it into £85,000 pots with different providers.

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