After being announced in last year’s budget, the new National Savings & Investments (NS&I) Investment Guaranteed Growth Bond has finally been launched.
The bond is a fixed rate product, offering 2.2% gross/AER. The Treasury announced it in November 2016 as a ‘market leading’ savings bond, but whilst it does offer the highest interest rate, it arrives at a time when inflation is high and expected to rise.
What exactly is it?
Contrary to what the name suggests, the new NS&I bond isn’t an investment product, but a savings bond with no element of capital risk.
The Investment Guaranteed Growth Bond offers a fixed return of 2.2%, and comes with the following conditions:
- A minimum of £100 is required to open the account and keep it active
- A maximum of £3,000 can be saved
- The term is three years
- Money can be accessed early but you will forfeit interest from the previous 90 days
- The 2.2% interest rate will remain fixed for three years
- The bond is online only, so users won’t be able to invest by post or phone
- Returns are potentially subject to tax depending on your circumstances
Who is the bond right for?
Even though the interest rate doesn’t quite beat the current rate of inflation, the NS&I bond is still more efficient than storing your money in a current account. The downside, of course, comes in the form having to tie your money up for three years, with a 90 day interest penalty if early access is required. The interest rate will be the main draw for many, as it is higher than all other similar accounts.
The fact that the bond can only be accessed and maintained online may be a disadvantage for some, as not everybody has access to the internet, and may prefer to use more traditional banking methods such as a branch, over the phone or by post.
Another thing to bear in mind is that any returns from the bond are taxable, which means that it will come out of your Personal Savings Allowance. This allowance, which currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, means that any savings income over the limit will be taxed depending on your income level. The returns from the NS&I bond won’t make that much difference, as saving the maximum £3,000 will bring in just shy of £200, but it is something to consider for those with various methods of saving.
Are there any better options?
At the time of writing this, the NS&I bond is the most competitive three-year fixed rate product available, but only just. There are a few three-year bonds that offer 2%, which if you save £1,000 would only make you £6 worse off after three years.
However, these accounts don’t limit, or place a significantly higher maximum limit, such as:
- The Secure Trust 2% AER three-year bond has a maximum limit of £1 million
- The OakNorth Bank 1.91% AER three-year bond has a maximum limit of £100,000
When the bond was announced in November 2016, the highest paying three-year bond offered a rate of 1.63% (source: Ikano Bank), so 2.2% seemed very competitive indeed. Regardless of how much inflation will rise, the lack of risk and the guaranteed return make the NS&I bond a viable option for many savers. The £3,000 limit could be higher, admittedly, but for the average saver it could well provide a safe place to keep your savings, with the added reassurance that the Treasury brings.