NS&I’s Best Buy – So What’s the Catch?
Savers can now secure a market-leading interest rate of 6.2 per cent on up to £1million at National Savings and Investments after the government-backed bank surprised savers last week by launching the best deal on the high street.
NS&I made its highest bid in 15 years – a highly unusual move that has propelled its bonds to the top of best-buy lists. Two NS&I bonds now have the best interest rates, ahead of any one-year fixed rate offered by banks and building societies.
But is it really the best bang for your buck? Wealth & Personal Finance examines the catches.
That’s how bonds work
NS&I issued 12 month guaranteed growth bonds at a rate of 6.2 per cent and guaranteed income bonds at a rate of 6.03 per cent on all deposits up to a staggering £1million. Interest rates are now the highest since the bonds were first issued in 2008 and apply to new bond issues. When the bonds mature, savers can withdraw their money or reinvest it at whatever interest rate is available.
Watch out for the taxes
Unlike premium bonds, income from Guaranteed Growth Bonds and Guaranteed Income Bonds is taxable. This means you may not take home the entire amount of interest that you earn.
Market-leading: NS&I has made its highest bid in 15 years – a highly unusual move that has propelled its bonds to the top of best-buy lists
Taxpayers with the basic tax rate can earn £1,000 in savings interest before paying tax. Savers can put £16,130 into the Guaranteed Growth Bonds before they exceed this threshold.
Higher rate taxpayers have a £500 allowance after which tax is charged. That means they can invest just £8,065 in the bond before triggering a 40 per cent tax bill. A higher-rate taxpayer who invests the full £1million would take home just £37,400 of the £62,000 in interest he earns over the course of a year.
Time is limited
Savers may need to act quickly if they want to secure the bonds. In the past, NS&I’s market-leading issues have caused chaos as savvy investors rushed to close deals.
In 2015, the state-sponsored bank issued a 65+ guaranteed growth bond, a fixed-term investment, for retirees. However, when the bonds were issued, NS&I’s website crashed due to high demand and callers faced a backlog at the hotline. Due to demand, the bonds were only available for sale for five months.
Savings Champion rates examiner Anna Bowes says there’s a chance the new bonds will be pulled from sale within months if NS&I is inundated with applications. She says: “The new bond issue will be extremely popular and the uptake will have to be managed.”
A lower interest rate could make you richer
NS&I bonds offer a better interest rate than any other deal on the high street, but that doesn’t necessarily mean they’ll make you richer.
It may be better to invest in a more tax efficient account, such as an Isa account. You can invest up to £20,000 each year in these accounts and all returns are tax free.
A higher taxpayer looking to invest £10,000 or more would be better off putting their money in the best paying Isa one year fixed rate cash bond rather than the NS&I bond. Shawbrook Bank pays 5.78 per cent, giving a return of £578 on a £10,000 investment. By comparison, the two NS&I bonds would pay £620 in interest, but the saver would only get £572 after tax.
Meanwhile, taxpayers at the basic tax rate would be better off investing in an ISA if they have £20,000 or more. Premium bonds are another tax-free savings option. However, there is no interest and no profit guarantee for premium bonds. The prize fund rate is currently 4.65 percent.
Your cash is locked away
You won’t be able to access the money from the new NS&I bonds until they mature in a year.
If you can’t commit to locking your money away for that long, Lucinda O’Brien of savings site money.co.uk points to Santander’s new instant access account.
Last month, the bank raised the interest rate on its Easy Access Edge Saver account from 4 percent to 7 percent, putting the account well above the top-paying accounts on the market.
Ms O’Brien says: “This could work well for those who need to withdraw their savings, as withdrawals are unlimited once opened – but remember you’ll need to open a Santander Edge current account to access it to be able to.”
The catch, however, is that only the first £4,000 in the account pays out the highest interest rate. You can earn £22.60 in interest each month, which equates to £271 over the course of a year.
Savers should also consider a termination savings account, which allows access to your savings if you give advance notice before paying out, she adds. Oxbury currently offers a savings account with 90 days notice and a variable interest rate of 5.45 percent.