Protect your nest egg as the axe falls on savings
By As safe haven NS&I is set to cut interest on its products, a raft of other accounts and prize draws could help plug the gap
Adele Cooke Adele.firstname.lastname@example.org Savings rates – Page 60
MILLIONS of savers who have ploughed money into National Savings and Investments (NS&I) this year should brace themselves – a round of rate cuts may be on its way. The Government-backed bank is widely regarded as a safe place to park your savings, however its popularity has skyrocketed in recent months. In August, NS&I surprised savers with the best rates on the market, paying 6.2 per cent on a one-year bond. But the bank was never destined to top best-buy tables and has already started to slash its rates.
Experts warn today that another round of rate cuts is imminent. Sylvia Morris, savings guru on our sister section Money Mail, says: ‘Britain’s 22 million Premium Bond holders are in line for a nasty New Year’s surprise.
‘These bonds have become a big hit since NS&I upped the prize fund rate to 4.65 per cent this summer and pulled in some £644million in September and October alone. However, unless savers abandon other NS&I accounts, it will have to cut rates to stem this flow – or bust its target. It has already ducked out of offering savers fixed-rate bonds so its variable rate accounts are now in the line of fire.
‘The 4.65 per cent rate might look lacklustre against 5 per cent-plus on easy-access accounts. But watch as easy-access rates starts to edge down – putting NS&I in the spotlight.’
As the likelihood of rate cuts increases, here we explain what to do to protect your nest-egg.
WHY WILL NS&I CUT RATES?
THE Government has tasked NS&I with attracting £7.5billion from savers this financial year, with a £3 billion margin either side of this target.
NS&I turbocharged its interest rates and Premium Bond prize rate this summer, to stop people leaving for better deals elsewhere. Dax Harkins, chief executive of NS&I, told the Government’s Public Accounts Committee last week that the bank was concerned savers would pull their money out to meet rising costs unless rates were improved.
The round of rate hikes was successful – more than 225,000 savers raced to open an account for the 12-month guaranteed growth bond, paying 6.2 per cent. It closed its best-ever bond just five weeks after it was launched.
Harkins confirmed last week the bank was now ‘on track’ to meet its target. So far, it has raised £9.8billion, just £700million short of its £10.5billion upper target for this financial year ending in March.
NS&I has already responded by cutting rates to stem the influx of cash from savers.
Among its other table-topping accounts was a Green Savings Bond which paid a rate of 5.7 per cent for three years. Last month, it was forced to slash its rate by 1.75 percentage points, to 3.95 per cent, after too many customers scrambled to open the account.
Experts now warn that NS&I may need to slash rates on its other accounts for two reasons.
First, it may need to slow the amount of cash that is being deposited by savers because taking on too much money could have a knock-on effect on its future fundraising targets, says Rachel Springall of rate scrutineer MoneyfactsCompare. A large influx indicates that the rates may be too generous compared to competitors.
And second, it must respond to market expectations that the Bank of England’s base rate will fall sooner than predicted next year.
PREMIUM Bonds are the UK’s most popular savings product, held by more than 21million investors, equivalent to nearly a third of the UK population.
Instead of offering a regular interest rate, savers are entered into a monthly prize draw, which offers a chance to bag a cash prize of between £25 and £1million. The Premium Bonds prize rate is equivalent to an average return of 4.65 per cent. Some investors will win prizes that give them a higher rate – but others, of course, earn nothing.
The rate is based on the number of bonds held and the value of the prize fund. At 4.65 per cent, it is at its highest level for nearly 25 years. But as NS&I’s most popular product, the Premium Bond rate could be among the first to be cut.
‘I’m convinced we’ve reached the peak for the Premium Bonds prize pot for now,’ says Andrew Hagger, of personal finance website Money Comms. ‘I expect the next rate movement to be downwards in order to manage the flow of funds to and from consumers.’
Savers can already earn more than 5 per cent with an easy-access account elsewhere, beating NS&I’s Bond prize rate. Top rates on easy-access accounts include 5.22 per cent at Metro Bank; Ulster Bank at 5.2 per cent; and Paragon at 5.16 per cent. Savers who want a guaranteed return on their nestegg can earn an average of 5.09 per cent with a fixed-rate bond, according to Moneyfacts Compare.
The money earned from Premium Bonds is tax-free but fixed-rate bond holders may have to pay tax if the interest they earn on their pots exceeds the Personal Savings Allowance. Basic-rate taxpayers can earn up to £1,000 in interest on their savings before they start paying tax. Interest earned above this is taxed at their marginal rate – 20 per cent. Higher-rate taxpayers pay 40 per cent tax on interest earned above £500. Additional-rate taxpayers pay tax on all interest.
Wealth & Personal Finance’s sister section, Money Mail, is campaigning to double the basic rate allowance to £2,000.
MANY savers buy Premium Bonds for the thrill of the chance to win big. But there are other options out there for these types of savers.
Springall says: ‘If savers want to enter a prize draw, then they could seek the latest offers from a few providers, such as Halifax and Bestinvest, to be in with a chance of winning a big cash sum.’
Savers with at least £5,000 in a Halifax savings account or cash Isa could win up to £100,000 in one of the bank’s monthly prize draws. There are 1,603 prizes up for grabs, and so far more than £75million has been given away to savers since the draws were launched in 2011.
Meanwhile, online investment platform Bestinvest offers one lucky saver the chance to win £250 in its monthly prize draws.
FIXED RATE BONDS
NS&I closed its table-topping 6.2 per cent one-year fixed rate bond on October 5.
And just a month later the bank surprised savers when it slashed the rate on its three-year Green Savings Bond by 1.75 percentage points, from 5.7 per cent to 3.95 per cent. It is the first time the bank has offered less than the base rate – currently at 5.25 per cent – on its eco bond since it launched two years ago.
The cut means savers taking out the bond now will earn £577 less interest over the three-year term than if they had paid in £10,000 when the rate was higher.
Green Savings Bonds are still on sale but experts warn that savers could see a better return elsewhere. ‘Regardless of whether NS&I drops rates further or not, the rates on offer for its standard savings accounts are no longer very competitive,’ says Anna Bowes, co-founder of website Savings Champion.
Savers who are prepared to shop around can earn more than 5.5 per cent with a one-year fixed rate bond. Metro Bank pays 5.8 per cent for one year. Meanwhile, Union Bank of India and Sharia-compliant bank Al Rayan pay 5.7 per cent.
A £10,000 sum with Metro Bank would give you £580 a year, £185 more than if you opened the NS&I bond. For longer-term deals, Union Bank of India pays a top rate of 5.7 per cent for two years and Bank of London and the Middle East 5.5 per cent interest fixed for five years.
THE NS&I easy-access accounts both pay less than 4 per cent. The Direct Saver account pays 3.65 per cent on deposits of up to £2 million. All interest is paid yearly.
NS&I income bonds also give savPremium
ers easy access to a nest-egg and allow deposits of up to £1million. The bonds have a rate of 3.59 per cent and interest is paid monthly.
These interest rates are well below the best on the market, so savers should consider switching to another provider, says Springall, adding: ‘As it stands, savers can earn more than 5 per cent on an easy-access account.
‘Savers who want a guaranteed return may prefer to lock their money away, but fixed-rate bonds are not for everyone, so easy-access accounts are likely to remain a firm favourite for their flexibility.’
At Metro Bank savers can earn 5.22 per cent on up to £2million for 12 months. A £15,000 nest-egg with Metro Bank would give you £783 in interest after a year, £244.50 more than if you had opened the NS&I Direct Saver account.
NS&I is treasured as a safe place to deposit cash, as it guarantees far larger sums than High Street banks. Its accounts are Treasurybacked, which means every penny invested up to £1million is protected if something goes wrong.
Most banks are part of the Financial Services Compensation Scheme (FSCS), which compensates savers up to £85,000 if a provider goes bust. This limit may be a challenge for savers with higher balances.
Savings platforms – websites where you hold several savings accounts in one place – can provide a useful alternative to NS&I. They allow customers with savings of more than £85,000 to spread money among different providers to guarantee their cash is protected.
Platforms including Saga Savings, Raisin and Interactive Investor Cash Savings allow customers to hold accounts with more than 20 banks and building societies.
DITCH NS&I ISAS
NS&I has two Isas on offer: an easy-access Isa and a Junior Isa, both paying below average rates. The Direct Isa pays 3 per cent on up to £20,000 a year and savers can withdraw their money at any time.
By contrast, Metro Bank pays 5.11 per cent with its Instant Access Cash Isa. A £20,000 nest-egg with Metro Bank would pay £1,022 in interest after a year, £422 more than if you had opened the NS&I Direct Isa account.
Other top rates include 5.09 per cent from Moneybox; Zopa Bank at 5.08 per cent; and Principality Building Society at 5.06 per cent.
Those who are prepared to lock their money away for a year could earn 5.71 per cent with Metro Bank; 5.5 per cent with Virgin Money; or 5.3 per cent at Aldermore Bank.
The NS&I Junior Isa also offers savers a mediocre return, at 4 per cent on balances of up to £9,000.
Parents would be better off opening a Junior Isa with Coventry Building Society, which has a rate of 4.95 per cent. Meanwhile, Leek, Skipton and Stafford Railway building societies pay 4.75 per cent.
Another option is to open a children’s savings account, which typically pays better than a Junior Isa.
Kent Reliance has the best children’s savings account, at 5.5 per cent for one year. Mansfield Building Society and Coventry Building Society have a young saver account at 5.25 per cent.
An NS&I spokesman said: ‘We will notify customers in advance of any rate changes.’
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