Changes to NS&I savings rates

On 2nd September 2019, National Savings and Investments withdrew from general sale its popular Guaranteed Growth and Guaranteed Income Bonds. In addition, it has also reduced the rate for existing customers looking to roll-over plans maturing after 5th October 2019 (if choosing to roll-over for the same term length), whilst for those customers choosing a different maturing term, the reduced rates become effective immediately.

For example, a one-year Guaranteed Growth Bond with a current rate of 1.5% will only attract a roll-over rate of 1.25% on maturity, whilst for a three-year bond with a current rate of 1.95%, the roll-over rate will be 1.7%. In both these cases, the quoted roll-over rates apply to maturities after 5th October 2019 (see here).

Fixed Interest Savings Certificates are also reduced, by 0.25% to 1.3% for two years and 1.9% for five years.

Earlier this year, NS&I delivered a blow to holders of its index-linked savings certificates by changing the rate paid on them from the Retail Prices Index (RPI) to the lower Consumer Prices Index (CPI). RPI currently stands at 2.6%, whilst CPI is 1.7%, this is significant, and equates to a reduction of interest of over 34%.

The main reason behind the changes to the terms offered by NS&I is the exceptionally low gilt yields that exist within the market at present. When determining the rates of interest offered on NS&I products, the Government looks to the comparative costs of raising money from the sale of gilts (essentially, bonds offered by the Government in exchange for a guaranteed return) rather than from NS&I savers. Uncertainty in todays’ markets means increasing demand for gilts, which in turn drives down the yield (the return on the gilt), so raising money this way is relatively cheap. It would be considered ‘unfair’ for NS&I savers to be rewarded by higher rates of return compared with gilt holders, when both types of investment are, ostensibly, loans to the Government. In addition, NS&I cannot offer rates so high that it raises too much or puts private sector banks at an unfair disadvantage, or so low that savers go elsewhere.

While reductions in interest rates are a blow to savers who rely on savings interest to maintain their incomes, one of the most attractive features of NS&I’s savings products remains that 100 percent of the balances are protected, regardless of size, as NS&I is wholly backed by HM Treasury. This means that savers with NS&I benefit from unlimited protection, whereas balances with other financial institutions are only generally covered up to the Financial Services Compensation Scheme (FSCS) limit of £85,000.