Millions of savers were dealt another blow earlier this month as NS&I announced rate cuts across their range, with even Premium Bonds affected.
National Savings and Investments (NS&I) was set up to provide a relatively cheap source of government borrowing. It offered security, simplicity and dependable returns and has remained a favourite for savers.
As a state owned savings bank, it has never set out to deliver market leading returns, and actually has rules in place to prevent it offering products that would stifle competition. However, despite moderate returns, a combination of a positive brand, the unique Premium Bond product and the fact that 100% of savings are government guaranteed, has allowed NS&I to attract around £100 billion in savings.
Savers ranging from grandparents to babes in arms have been receiving returns of up to 1% in recent months. This may not be very exciting, although a look at returns across the market shows that it is not unreasonable.
However, with the Bank of England base rate now just 0.25%, a cut to NS&I interest rates was expected. That has now materialised. At the beginning of February, it announced that it would be cutting rates on its:
- Direct ISA
- Direct Saver
- Income Bonds
- Premium Bonds
How the cuts are being applied
NS&I will reduce interest rates on four of its variable rate products including its Direct ISA, which is currently offering the best rate on the market at 1%. In May, this will fall by 0.25% to 0.75%.
Equally dramatic cuts are being applied to the Premium Bond fund. The prizes it pays out each month will be cut, with the number of £100 and £50 prizes slashed by a third. Whilst the number of £100 and £50 prizes being won by Bondholders will fall from 70,950 to 20,729 per category.
The bad news has been sweetened by an increase in the number of savers winning the smallest prize, worth £25, which will rise by around 100,000 a month. This means the overall number of prizes will only fall slightly from 2,224,513 to 2,219,493.
The number of people winning the top prize of £1,000,000 will remain the same with two winners each month.
How the rates are falling
The following table shows the new NS&I savings rates which will apply from 1st May 2017:
[table id=1936 /]
Furthermore, the indicative interest rate on Premium Bonds will fall from 1.25% AER to 1.15%.
What does this mean to you?
If you are among the many hundreds of thousands who have stashed a little away in Premium Bonds, the cut probably won’t be enough for you to consider moving away. In fact, with so little interest on cash for savers available anywhere, Premium Bonds can look more attractive. After all, if your savings are returning basically nothing, you might prefer to take the chance of the jackpot prize. Furthermore, you also still enjoy cast iron security.
Where can you find better returns?
But if a flutter on Ernie, NS&I’s venerable Electronic Random Number Indicating Equipment, responsible for picking winning premium bonds, does not appeal, what are the other options?
There are of course many alternative savings providers. At time of writing, rates of up to 1.55% AER are available from the best buy instant access accounts. This compares well with the new NS&I rates, especially when the new Personal Savings Allowance is taken into account, which means the majority of people won’t pay tax on their savings.
There are of course many alternatives to saving, including:
- Peer to peer lending
- Structured products
- Investments in equities, corporate bonds or property, usually via collectives known as funds
However, these involve additional risk, and the value of your investment certainly can go down as well as up. Savers have now put up with low interest rates for nearly a decade, it has to be doubtful whether the recent cuts to interest rates are enough to turn a saver into an investor.
If, however, you do wish to consider your options, or have other questions about this article, please don’t hesitate to get in touch with us on 0115 933 8433.
The Financial Conduct Authority does not regulate National Savings and Investments products.