The interest National Savings & Investments (NS&I) pays on our money became slightly more attractive in December 2017 when all its rates were raised by 0.25% – the full amount of the rise in the Bank of England base rate in November. Many banks and building societies have not yet passed on that rise in full to their customers. However, although some NS&I rates are now quite good, they are generally not best buys in terms of interest paid and are suitable only for some people.
All the money you put into NS&I products is safe up to any amount. Money saved in a bank or building society is guaranteed only up to £85,000 per institution. If the bank or building society went bust that is the maximum you would be repaid. People with more than that should spread it across different banks so it is all protected. By contrast, all the money in NS&I products is guaranteed by the Government. Some products will allow investments of up to £2 million – more than enough for nearly everyone!
NS&I no longer sells index-linked savings certificates. People who took them out can roll them over into new index-linked certificates of the same duration when the end of their term is reached. That happens automatically unless the saver cashes them in or chooses a term of different length. The money in index-linked certificates increases by the rise in the Retail Prices Index. At the moment that is growing by about 4% a year – double any rate that can be obtained in other savings accounts. Anyone lucky enough to have an index-linked product should consider rolling it over.
Certificates can be cashed in at any time, though there is a penalty of three months’ interest. If in future a new index-linked product is announced, it is well worth considering buying as much as you can afford.
Savings and income
The NS&I Income Bond now pays 1% interest monthly. The interest cannot be kept in the account, so the investment can’t build up and grow in value. If you want to reinvest in an income bond, it means saving the interest elsewhere until it adds up to at least £500 – the minimum deposit that can be made. Interest on the income bond is taxable but is paid gross and has to be declared to HMRC so the correct tax is deducted. If the interest is less than £1,000 it will normally be tax-free for basic-rate taxpayers. The maximum investment allowed in the account is £1 million. An alternative is the Direct Saver, which pays 1%, but the interest is added yearly and kept in the account. The maximum investment is £2 million. Money can be taken out of either account without notice. Both are suitable for people who want the safety of NS&I and are not interested in ‘rate-chasing’ the very best rates every six months.
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Nearly half the money entrusted to NS&I is in Premium Bonds. They work in a unique way. The interest on the £70 billion invested in them is now 1.4%. It is all paid into a prize fund, which is divided up among the billions of bonds. The process is genuinely random: numbers are generated by ERNIE4 (the fourth version of the original Electronic Random Number Indicator Equipment) and certified by the Government Actuary’s Department each month. It does not matter where you live, when you bought the bonds, or how many you have. Each one has a 1 in 24,500 chance of being picked in each monthly draw (there is a one-month wait for new bonds to go in the draw).
Premium Bonds are best for people who pay higher-rate tax and can afford to put in the maximum £50,000. Almost all the prizes are for £25 and every month nearly three million are awarded. In the long term someone with £50,000 can expect to get two of these prizes each month. That works out at a 1.2% return tax-free. For higher-rate taxpayers that is the equivalent of a 2% return on a taxed account or 1.5% for a basic-rate taxpayer.
The odds are better for those with a big holding – 400,000 people have the maximum £50,000. For them it means a pretty regular tax-free income on a chunk of their savings. Premium Bonds can be cashed in at any time as it is only the interest that is gambled, not the capital.
Bigger prizes are rare. Even someone with £50,000 would wait 59,000 years on average to win one of the two monthly £1 million prizes. And the relatively humble £1,000 prize would come only once every 70 years or so. Those with smaller amounts – perhaps £100 invested years ago – can only expect to win anything around once in 20 years.
I am not so keen on other NS&I products. Their ISA and the junior ISA can be bettered in the market and you are unlikely to have more than £85,000 in either. The NS&I Investment Account pays only 0.7% taxable.
More than 800,000 people who invested in NS&I’s three-year 65+ Guaranteed Growth Bond early in 2015 face a big decision when their 4% bonds mature over the next few months. They can be cashed in or rolled over into a replacement bond, probably paying a lot less. Details will be sent out 30 days before the end of their term. NS&I will accept instructions only in writing or online, not over the phone.
NS&I introduced two new bonds in December with guaranteed returns over one and three years. Guaranteed Growth Bonds offer 2.2% over three years or 1.5% over one year. The Guaranteed Income Bonds pay slightly lower rates but the income is paid out monthly. Interest is taxable but is paid gross. The bonds can only be opened online and up to £1 million can be put into each. Early withdrawals are allowed with the loss of 90 days' interest. So the three-year bond is slightly better value for a one-year investment, earning 1.65% even after the penalty.
For more information look at nsandi.com/our-products
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