National Savings and Investments (NS&I) has launched its British Savings Bonds today, priced at 4.15% gross/AER.
The three-year fixed rate is available with the ‘Guaranteed Growth Bond’ and a lesser rate of 4.07% gross (4.15% AER) is on offer with the ‘Guaranteed Income Bond’.
The bonds are designed to be held for the full term, so you cannot exit or withdraw from the account earlier than the three-year period agreed.
Both accounts require at least a £500 investment to open and a maximum of £1m, but the ‘Guaranteed Income Bond’ allows the interest you accrued to be paid out monthly.
To invest in the bonds, you’ll need to head to the NS&I website, which is where the account is managed. However, if an online-only account is an issue, the provider has said there is “support for customers who are unable to transact online.”
Bonds available for ‘extended period of time’
The decision to introduce the British Savings Bonds, available for an “extended period of time”, came in the Government’s Spring Budget in a bid to encourage more people to save in the long term.
Bim Afolami, economic secretary to the Treasury, believes the bonds “will help to grow the savings culture in the UK while providing cost-effective financing for the Government.”
However, if you want the best returns on your investments, you may wish to shop around. The current leading three-year fix is priced at 4.67% from Zenith Bank (UK) Ltd, using Moneyfacts’ data, while over 20 other providers can beat the 4.15% rate from the NS&I, says AJ Bell.
Despite NS&I saying savers are “in safe hands” with the Government-protected service and “the only provider that secures 100% of your savings”, financial experts are not convinced about the value the bonds offer.
Bonds are ‘fancy bit of marketing’
Laura Suter, director of personal finance at AJ Bell, describes the bonds as “a fancy bit of marketing [that] aren’t actually any different to putting your money in other NS&I products.”
“Despite being branded as ‘British Savings Bonds’ the money will go into the general Government coffers, in the same way as other money raised by NS&I”, Suter said.
Last year, the Government bonds provider launched a one-year equivalent at a much higher rate of 6.2% AER, which sold out “after five weeks”, which Suter believes is the reason behind the underwhelming price point.
She added: “NS&I said it wanted to price these bonds so they’d stick around, rather than selling like hot cakes, and this middle-market offering may just do that.
“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.”
‘Doomed to mid-table mediocrity’
Sarah Coles, head of personal finance at Hargreaves Lansdown – which won Best Lifetime Investment ISA at the YourMoney.com Awards 2024 – thinks the bonds “may well be doomed to mid-table mediocrity.”
Coles said: “This is disappointing, especially after the fanfare in the Budget, because it’s so far behind the market leaders. At this rate, these bonds risk disappearing without a trace.
“NS&I was always going to have to offer something special to get savers excited about three-year savings deals. Easy-access savings are dominating the market, where savers can make more than 5% without any need to tie their cash up for longer.”
Coles added: “These NS&I rates just aren’t special enough to persuade swathes of new savers to tie their money up for longer. Easy-access and short-term fixed accounts offer higher rates right now because longer fixes factor in expectations that interest rates will fall during the term. However, at the moment, there are decent rates available on longer fixes that are worth considering.”
Here are five pointers to consider when investing in an NS&I bond, provided by AJ Bell.
Five considerations before investing in NS&I bonds
- You can’t withdraw your money early: Under 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 three years with no option to exit early.
- You can invest up to £1m: 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 £1m 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 if you’re retired.
- 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.
- NS&I is Government-backed, but do you need that? A big appeal of NS&I is that it is backed by the Government, so is seen as the safest place to keep your money. However, other banks and building societies are protected by the Financial Services Compensation Scheme (FSCS), which covers up to £85,000 of money per person, per financial institution.
