National Savings & Investment Rates

It was announced recently that National Savings & Investment rates are going to fall on the three main savings vehicles we use. These are:

• Premium Bonds
• Income Bonds
• Direct Saver

I thought it would be useful to recap why we still consider these investments to be a core part of an individual’s “foundation” funds, particularly for emergencies.

Individuals holding cash will typically do so for two main reasons:

• Either they require the funds in the short term to meet Income or other capital expenses.

• That they are concerned of seeing capital drawdowns, where this would impact on their livelihood, for example with emergency funds.

Any individual that is looking to keep funds in the longer term may well be better looking at an appropriate investment portfolio. This does not need to have the volatility of the stock market but does mean that there can be individual time periods where their investments could be worth less than it was over the previous period. In this circumstance best advice may be to pause withdrawals or otherwise reduce access. For these reasons, we have been, and continue to be, very keen on National Savings & Investments.

Other banks and building societies will offer better rates from time to time and in the current climate there are some rates that vary between 1% and 2% but with the demise of Santander 123 for most investors due to the regular cost and reduced interest rates, most people have to shop around and be more aware of what else is available.

NS&I consistently offer reasonable rates – never the best – but also typically above average.

Additionally, NS&I have the benefit of unlimited protection. This contrasts to most banking institutions who will only have the £85,000 Financial Services Compensation Scheme (FSCS) limit. For those holding more significant funds NS&I gives piece of mind, again without having to have the hassle of multiple funds.

It used to be that Income Bonds gave the best return paying 1.15% but this will fall to 0.70% from May. Interest is paid monthly and for these reasons it used to be preferred for many investors to the “Direct Saver” which was paying a lower rate of 1.00% and this too will fall to 0.70% from May.

Therefore, there is little to choose between these two structures with limits of £1 million and £2 million respectively.

For many Premium Bonds will be the preferred vehicle, as whilst they don’t offer interest in the formal sense an investor currently holding Premium Bonds has an expectation of a 1.40% return each year and this will only reduce to 1.30% from May.

I use the phrase “expectation” rather than interest rate as an individual’s experience in returns will differ, and typically be lower than this as the rate is actually distributed from a prize fund with the most common prize being £25 and this is diluted by the jackpot which can be as high as £1 million.

Direct Saver and Income Bonds are both taxable (although paid without tax deducted for most investors) and Premium Bonds are tax free. This means not only are Premium Bonds given the best headline rate they are worth 1.63% for a basic rate tax payer and 2.17% for a higher rate tax payer.

It is very disappointing to see the reduction in these rates and whilst the reduction in Premium Bonds at 0.10% is only an 8% fall the reduction on Direct Saver and Income Bonds is a 43% reduction in the headline rate and a 64% reduction in the headline rate for Direct saver and Income Bonds respectively.

As I started this piece, individuals should not hold cash expecting any real return, and even the best high street rates are likely to be losing money with inflation, but as a safe haven I still think the above are useful with Premium Bonds being my personal favourite given the current rates outside of a smaller (few thousand) slush fund that is available quicker than the encashment of Premium Bonds.