Ever since it was founded in 1861, National Savings & Investments (NS&I) has been a secure place to store money.
In theory, saving with NS&I is a win-win situation. The Government uses the money to fund its public sector net cash requirement, and in return it offers a 100% guarantee on savings from HM Treasury. This beats the level of protection that the Financial Services Compensation Scheme (FSCS) provides (currently £85,000 per account, per institution) as the NS&I don’t put a cap on how much is protected.
However, whilst saving money with NS&I is secure, how good are the returns?
In the past 12 months, £11.8 billion has been put into NS&I products, with the most common being:
- Premium Bonds (£7.7 billion)
- Income Bonds (£6 billion)
- Direct Saver Accounts (£2.2 billion)
With inflation for July at 2.6%, savers need to ensure a return above this rate to avoid a real terms loss. So, exactly what are the returns like for NS&I products? And more importantly, how do they compare to the rest of the market?
Premium Bonds
Premium bonds were the most popular product, with £7.7 billion put into them. This brings the total amount held in premium bonds to £70 billion.
Premium Bonds have been so popular in the last 60 years that nearly one in three people in the UK holds them. It’s easy to see the appeal; each bond held could potentially make you a millionaire. For those that don’t know, it is worth pointing out that Premium Bonds is essentially a lottery. No interest is paid on them. Instead, a prize structure exists, with each £1 bond being assigned a number that goes into a monthly prize draw.
The official ‘return’ rate is currently 1.15%, which refers to the chance of winning a prize, rather than paid interest in any form.
Premium Bonds can be bought and redeemed for their cash value at any time, and the prize money is tax-free, so a comparable product would be an instant access Cash ISA. The best rate at the time of writing was offered by the Scottish Building Society, and offered 1.55%.
Income Bonds
Income Bonds were the second most popular product, with £6 billion paid into them in the last 12 months. The minimum that can be held is £500, all the way up to £1 million. For many, the appeal for the NS&I Income Bond comes from the variable rate. It is currently at 0.75%, but has fluctuated over the past ten years between 0.7% and 4.8%.
In the last three years, the interest rate has dropped from 1.75% to 0.75%, so savers have little chance as it stands of beating inflation. Money held in Income Bonds can be withdrawn at anytime, with no penalties, so an instant-access savings account is a comparable product. Neither product is tax-free, so any returns will count towards your Personal Savings Allowance, which is:
- £500 if you are a basic-rate taxpayer
- £1,000 if you are a higher-rate taxpayer
- £0 if you are an additional-rate taxpayer
At the time of writing, the best performing instant access account that could be opened with £1 was from Ulster Bank, offering an interest rate of 1.25%.
Direct Saver Account
The NS&I Direct Saver account came in third, with £2.2 billion being paid in over the last 12 months.
The Direct Saver can be accessed at any time, and can be opened with a balance of just £1. Currently, the Direct Saver offers a return of 0.7%, the second lowest offered by a NS&I product. The interest rate has gradually dropped from 2% over the past seven years.
Again, at the time of writing, the best performing instant access account that could be opened with £1 was from Ulster Bank, offering an interest rate of 1.25%.
Investment Guaranteed Growth Bond
When the Investment Guaranteed Growth Bond was announced, it was intended to be both market-leading and inflation-beating. Unfortunately, neither of these have happened. Contrary to the name, the bond is not an investment product; instead it is essentially a three-year fixed rate bond with a maximum limit of £3,000.
Whilst the NS&I Bond isn’t market-leading, it does fare quite well near the top of the best-buy table. At the time of writing, there is only one account above it; the PCF Bank 3 year fixed-rate bond, offering an interest rate of 2.22%.
Why do so many people save with NS&I?
Whilst NS&I products don’t always (or often) match the returns of its competitors, people are still choosing to put their money into its products. £11.8 billion was saved last year, and the NS&I forecast that £13 billion will be saved with them over the next 12 months.
Being backed by HM Treasury plays a huge part in its popularity. A 2016 survey of 4,000 financial advisers revealed that 31% of clients who saved money using NS&I products did so because of the HM Treasury guarantee. Whilst most savings accounts are covered by the FSCS, the current limit is £85,000 per account, per institution. For savers who hold more than this, NS&I offer a guarantee on money saved, regardless of the amount.
For more information, don’t hesitate to get in touch by calling the number at the top of the page.
