I have £3k to save: is it worth waiting for the ‘market-leading’ NS&I bond?
In the Autumn Statement last year, the government unveiled plans to launch a three-year bond paying around 2.2% (exact rate to be confirmed) on up to £3,000 through its savings arm, NS&I.
The new bond, officially known as the Investment Guaranteed Growth Bond, will be available for 12 months from spring 2017 and will be available to anyone aged 16 and over. No further details have been released on exactly when in spring the product will be launched.
Following the announcement, industry experts welcomed the gesture as the product would be paying far more than similar products on the market (the best five-year bond currently pays 2.05%, while the best three-year fixed bonds pay 1.75%).
However, with the Bank of England forecasting inflation to reach 2% in February and 2.8% by the start of 2018, the NS&I product would offer little relief to beleaguered savers desperate for a better return on their cash.
But for anyone with £3,000 to save, are there better alternatives?
The NS&I three-year bond
At an indicative 2.2% interest rate, the maximum interest you can earn is £66 per year or £198 in three years without taking into account any compounding of interest. With compounding, the maximum amount you’d receive is just over £202.
But in order to get this maximum amount, you would need to lock your money away for three years, so if you know you’ll need your money sooner than this, it may not be the right product to house your money.
However, one of the bonuses of NS&I products is that they’re backed by HM Treasury so they offer 100% capital security.
Andrew Hagger of research firm Moneycomms, said: “I still feel that it is little more than a token gesture from the government that knows how much savers have suffered since it has been in power, however when you look at what’s on the table is it really that magnanimous?”
He said the NS&I bond will probably still prove to be popular because people will always try to get the best deal on their savings. But if you only have £3,000 or so to play with, he suggests considering Tesco Bank.
Tesco Bank current account
A current account in name, this product is actually more of a savings product. The Tesco Bank current account offers 3% AER/2.96% gross variable on up to £3,000 and this rate has been guaranteed for two years – from 1 April 2017 to 1 April 2019, for both new and existing customers.
With current accounts, it’s common for switchers to have to set up direct debits or standing orders, as well as pay in a minimum amount each month, but there are no such requirements with this product.
You could earn £90 per year and in two years you could earn £180 in interest. Hagger says: “Importantly, you retain instant access to your cash – I think it’s a no brainer.”
Although rates on cash ISAs remain poor, they offer tax-free savings year-on-year, so could be worth considering.
According to data site Moneyfacts, the best easy access ISA currently on the market is from Virgin Money paying 1.01% (it is a “defined access” product which allows three withdrawals each year) and the top three-year fixed ISA from Paragon Bank pays 1.30%, way off the 2.2% offered by NS&I or 3% from Tesco Bank.
But Rachel Springall, finance expert at Moneyfacts, says savers would still be wise to consider them for the long-term tax benefits.
She says: “We have the Personal Savings Allowance (PSA) but this is not guaranteed to be around forever and rates may not stay at their current lows – so failing to use an ISA allowance each year could come back to bite.”
Springall says locking away money for three years or more into a fixed ISA will provide better returns than into an easy access ISA but taxable fixed rate bonds merit higher returns. Paragon Bank pays 1.30% on its three-year fixed ISA but Atom Bank pays 1.75% on its three-year fixed bond. This is still a long way off NS&I’s 2.2% though.
In the current low interest rate environment, you may want to consider a move to stocks and shares ISAs where the risks may be rewarded with attractive returns. See YourMoney.com’s A practical guide to moving from a cash to stocks and shares ISA.
If you’re under 40 and looking to save for your first home, the Lifetime ISA (LISA), set to launch in April 2017, could be another option.
It will allow savers to contribute £4,000 each tax year and the government will add a 25% bonus – that’s potentially £1,000 each year. See YourMoney.com’s All you need to know about the Lifetime ISA guide for further details of the scheme if you’re considering saving the money for a longer period of time.