NS&I: Steer clear of Government-backed savings following interest rate cuts

NS&I has lost touch with today’s savers… but doesn’t seem to care, says David Prosser

Cuts to NS&I interest rates mean that it no longer offers a decent return (iStock)

National Savings & Investments, the Government-backed savings bank, has rarely paid the most competitive interest rates on the market, but the deals it offers are now even less attractive following cuts that came into effect this week.

These reductions apply across three different NS&I products: as from Monday, the rate payable on its Direct ISA has come down from 1.25 per cent a year to 1 per cent; the Direct Saver rate is down from 1.1 per cent to 0.8 per cent; and Income Bonds now pay 1 per cent, down from 1.25 per cent. In addition, from 1 July, NS&I’s Investment Account will pay only 0.45 per cent, against 0.75 per cent currently.

Each of these savings products serves a slightly different constituency, but it’s now worth asking whether there’s any point in bothering with NS&I accounts at all.

Traditionally, the allure of NS&I has been its Government backing – in return for the complete security of a balance sheet underwritten by the UK Government, savers have been prepared to accept slightly less competitive rates of interest than they might find in the private sector.

However, the Financial Services Compensation Scheme now guarantees savers caught out by the failure of their bank or building society would be refunded, subject to maximum compensation of £75,000. And the FSCS is also underwritten by a Government guarantee.

In other words, for the 95 per cent of savers who don’t have more than £75,000 in their accounts, the protection on offer from NS&I is no more valuable than what stands behind them when they deposit money on the high street. That means the decision about whether to put your money into a NS&I account will almost always come down to the question of whether it offers a decent rate of interest.

The short answer to that question, in almost all cases, is that it doesn’t. Take cash individual savings accounts (Isas), where the NS&I rate has just been cut by a fifth. Savers with Coventry Building Society’s Easy Access Isa 3, or Sainsbury’s Bank’s Cash Isa, can earn 1.3 per cent on their money – some 30 per cent more.

While the differentials may sound trivial, they start to add up on sizeable sums. The maximum cash Isa investment this year is £15,240, so NS&I’s interest rate is worth £152.40. At Coventry or Sainsbury’s, by contrast, you would earn almost £46 more. Remember, too, that many cash Isas accept transfers of money invested in previous years, so your total account balance may actually end up being much larger, as will your gains in better paying accounts.

On easy access savings accounts, the niche of the savings market in which NS&I’s Direct Saver operates, the best deals in the private sector come from RCI Bank, offering 1.45 per cent a year, and Shawbrook Bank, paying 1.25 per cent. These are online accounts, but you can get 1.15 per cent in the branch, on the phone or by post at the Coventry Building Society. Direct Saver’s new rate of 0.8 per cent is miles behind, while the 0.45 per cent available from the postal-operated Investment Account is even less generous.

As for NS&I’s Income Bonds, which pay monthly income to savers who need it, the 1.55 per cent a year on offer from Charter Savings Bank is more than half as generous again as the new rate from the Government-backed bank. That account does require three months’ notice of withdrawals, but if you want easy access to your cash, you can still get 1.45 per cent from RCI Bank.

It’s only fair to point out that private sector banks and building societies have been cutting their rates too in recent weeks and months, amid changes to assumptions about when the Bank of England might finally begin raising interest rate. Most economists don’t see this happening until late 2017 at the earliest.

However, savers with NS&I suffer from an additional issue – what the bank chooses to pay in part depends on how much money the Government wants it raise. Earlier this year, the Treasury announced it expected NS&I to contribute £6bn to Government finances during the 2016-17 financial year, substantially down on the £11.5bn raised in 2015-16. The bank’s chief executive, Jane Platt, says: “NS&I aims to strike a balance between the needs of savers, taxpayers and the stability of the broader financial services sector, while raising the required level of net financing for the Treasury.”

In other words, since the Government-backed savings bank doesn’t need so much of your money this year, it’s not going to work too hard to win your business. New savers should certainly steer clear – and if you’ve got existing accounts with NS&I, now is the time to consider moving your money elsewhere.