Following the news that NS&I has launched its British Savings Bonds today, Laura Suter, director of personal finance at AJ Bell, has been drilling down into the detail and has shared her analysis with us below:
“The popular British Savings Bonds are back on sale – and despite offering less interest than the market leader, they are likely to sell quickly once again. NS&I has launched a two and five-year version of the bonds, as well as raising the interest rate on the existing three-year version.
“The one-year version of these bonds that went on sale in Autumn last year sold rapidly, selling out in five weeks, and the bonds raised over £10 billion of the total £11.3 billion NS&I raised in the last financial year. More than a quarter of a million customers clamoured for the one-year version of the accounts, which paid 6.2%.
“However, the interest rates on these new bonds aren’t as enticing. There are a number of providers in the market offering higher rates. The top two-year fixed rate account in the market pays 5%, compared to the 4.6% on offer from NS&I. It’s the same case with the five-year bonds, where the market leader is paying 4.55%, compared to the 4.1% from the British Savings Bond. On the two-year version of the bond you’d be sacrificing £20 a year interest on £5,000 saved, which some savers may feel is a sacrifice worth making. 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.
“Regardless, these accounts are likely to be very popular as they are backed by NS&I and many savers have huge brand loyalty to the organisation. There are around 550,000 existing bond accounts held by NS&I customers, with an average investment of almost £52,000 in each account.
“Savers need to be careful they don’t land themselves with an unwanted tax bill with these accounts. While NS&I’s Premium Bonds are tax-free, these British Savings Bonds aren’t, which means that you could pay tax on the interest you earn if you breach your Personal Savings Allowance. With the growth version of the bond, you will be taxed on all the interest you receive when it’s paid out at the end of the term – which could mean you breach your tax-free Personal Savings Allowance. If this is the case you may be better off opting for the Income version of the bond, which pays out interest monthly. However, you won’t benefit from compounding in this account.”
Five things to consider before buying
- You can’t withdraw your money early: Under some 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 term 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 and then you can only access it at the end of the fixed term. Bear in mind your tax situation though.
- 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.
