Laura Suter, director of personal finance at AJ Bell, comments on the launch and appeal of NS&I’s British Savings Bonds
The popular British Savings Bonds are back on sale – and despite offering less interest than the market leader, they are likely to sell quickly once again. NS&I has launched a two and five-year version of the bonds, as well as raising the interest rate on the existing three-year version.
The two-year British Savings Bonds will have 4.6% AER interest
The five-year British Savings Bonds will have 4.1% AER interest
The rate on the three-year bond has increased to AER 4.35%
Income and Growth versions of the bond are on offer for investments from £500 to £1 million.
The one-year version of these bonds that went on sale in Autumn last year sold rapidly, selling out in five weeks, and the bonds raised over £10 billion of the total £11.3 billion NS&I raised in the last financial year. More than a quarter of a million customers clamoured for the one-year version of the accounts, which paid 6.2%.
However, the interest rates on these new bonds aren’t as enticing. There are a number of providers in the market offering higher rates. The top two-year fixed rate account in the market pays 5%, compared to the 4.6% on offer from NS&I. It’s the same case with the five-year bonds, where the market leader is paying 4.55%, compared to the 4.1% from the British Savings Bond. On the two-year version of the bond you’d be sacrificing £20 a year interest on £5,000 saved, which some savers may feel is a sacrifice worth making.
It’s tricky for NS&I to get the interest rate right on these products: too high and they’ll attract swathes of cash and have to pull the accounts from sale, too low and savers will go elsewhere, meaning NS&I will have to crank up the interest rate later.
Regardless, these accounts are likely to be very popular as they are backed by NS&I and many savers have huge brand loyalty to the organisation. There are around 550,000 existing bond accounts held by NS&I customers, with an average investment of almost £52,000 in each account.
Savers need to be careful they don’t land themselves with an unwanted tax bill with these accounts. While NS&I’s Premium Bonds are tax-free, these British Savings Bonds aren’t, which means that savers could pay tax on the interest you earn if they breach their Personal Savings Allowance. With the growth version of the bond, savers will be taxed on all the interest they receive when it’s paid out at the end of the term – which could mean they breach their tax-free Personal Savings Allowance. If this is the case they may be better off opting for the Income version of the bond, which pays out interest monthly. However, they won’t benefit from compounding in this account.
