NS&I is failing savers
Filed under: Savings & ISAs
National Savings & Investments (NS&I) is the government's savings arm. If you deposit money in an NS&I account, you're effectively lending money to the government.
Need to know: Savings
As NS&I is backed by HM Treasury, it is supported by 'the full faith and credit of the British government'.
Savers suffer as rates plunge
Trouble is, NS&I is paying too low rates on its accounts. This is largely a result of the financial crash in 2007/9.
Need to know: Savings
In difficult times, investors look for safety, and since 2009 international investors have rushed to buy ultra-safe, highly rated government bonds such as UK gilts. As a result, UK bond yields have plunged to all-time lows and the UK government can borrow easily and cheaply in the financial markets.
This means the government doesn't need to raise much from NS&I and the range of products on offer from NS&I look grim as a result.
Let's briefly review NS&I's entire range of savings products, and see just how grim they are:
1. Premium Bonds (a tax-free 1.5% a year)
Every month, NS&I holds a monthly draw with a million tax-free prizes on offer, ranging from £50 to £1 million. Thus, instead of receiving interest on your cash, Premium Bonds give you the chance of winning sums small and large. Obviously, the more Bonds you own, the better your odds of winning.
Alas, the effective rate of interest (calculated by dividing total prize money by the total value of bonds) is just 1.5% a year. While this is miles better than the National Lottery, it's still less than half of what your cash could earn in top-paying, tax-free cash ISAs.
2. Direct Saver (a taxable 1.5% a year)
This is an easy-access, everyday savings account with no notice or penalties for withdrawals. It is operated online and by telephone. Sadly, Direct Saver pays an interest rate of just 1.5% a year, plus this interest is taxable. In short, there are far better homes for your emergency fund or rainy-day cash.
3. Direct ISA (a tax-free 2.5% a year)
This is a tax-free cash ISA (Individual Savings Account), which you can manage online or by telephone. The interest rate is 2.5% which is well below the top Cash ISAs on the market at the moment.
4. Income Bonds (up to 1.75% a year, taxable)
Income Bonds pay monthly interest at a variable, tiered rate based on the level of your savings. You can cash out of these bonds by post with no notice or penalty, making them similar to easy-access accounts.
Unfortunately, the income paid by these bonds is both taxable and low. Right now, they pay 1.46% a year on deposits of £500 to £24,999 and 1.75% a year on sums over £25,000. Again, these are far from market-beating rates and are best avoided.
5. Investment Account (a taxable 0.75% a year)
Of all NS&I's accounts, this is the worst by far. It is a no-notice, no-penalty, easy-access savings account operated solely by post. It pays interest of a tiny 0.75% a year on £1+ -- and this is taxable, too. You'd have to be bonkers to put money in this account.
6. Children's Bonus Bonds (a tax-free 2.5% a year)
These Bonds are designed for parents and other relatives to save for a child's future in his/her name. The current batch, Issue 34, pay a fixed, tax-free return of 2.5% a year for Bonds held for five years.
Early withdrawal from these fixed-term Bonds incurs penalties, with no interest paid if cashed in within the first year. Again, I wouldn't tie up money for five years so as to earn a mere 2.5% a year, even though this interest is tax-free.
Six down, six remaining
Usually, with 12 products in NS&I's arsenal, we'd still have six accounts remaining. At present, NS&I does not offer the following six savings accounts:
1. Index-linked Savings Certificates -- pay tax-free returns for lump sums above the Retail Prices Index measure of inflation.
2. Fixed Interest Savings Certificates -- pay fixed, tax-free returns on lump sums.
3. Guaranteed Growth Bonds -- pay fixed rates of taxable interest over a set period.
4. Guaranteed Income Bonds -- pay a fixed, monthly income which is taxable.
5. Easy Access Savings Account -- this account closes on 27 July 2012. It paid very low rates of taxable interest, so good riddance.
6. Guaranteed Equity Bonds -- investments offering returns linked to the future performance of the UK's FTSE 100 share index.
While I've never been a fan of products three to six, the first two accounts have been hugely popular with British savers in the past. In particular, Index-linked Savings Certificates used to attract billions of pounds of 'hot money', as savers grabbed this guarantee to beat inflation. Of all six suspended accounts, I'd like to see Index-linked Savings Certificates return at once.
A poor piggy bank
In summary, I believe that NS&I -- the government's piggy bank -- is letting down British savers by providing a small range of accounts offering poor interest rates. After suffering for four years, we savers deserve far better products from NS&I today!
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