I have a feeling that National Savings and Investments (NS&I) is either going to have to increase its Premium Bond prize rate or launch an enticing new product this year to attract savers’ cash.
That’s because it has revealed details of its new British Savings Bond, announced with much fanfare in the spring Budget.
And it turns out to be a damp squib — nothing more than another three-year bond with a mediocre rate.
As I predicted, the Guaranteed Growth Bonds and Guaranteed Income Bonds went on sale in the first week of April with a rate of 4.15 per cent a year, or 4.07 per cent if you want your interest paid each month.
Industry insiders tell me NS&I could face difficulty in encouraging savers into these new bonds.
For a start, three-year bonds tend to be unpopular. Almost all savers prefer easy-access accounts or one-year bonds.
For example, three-year deals make up a mere half a per cent of money going into Hargreaves Lansdown’s savings platform because savers want easy access and shorter term bonds.
If savers don’t snap up these British Savings Bonds, NS&I will have to do something else to attract us to its products.
That’s why I think more prizes for Premium Bond holders, its best-seller, could be on the cards. Let’s hope it also does more for Isa savers, too. All NS&I offers is its easy-access Direct Isa at a lousy 3 per cent.
The Government-backed bank has a lot of work to do when it comes to attracting savers.
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The Treasury wants it to bring in £9 billion (in a range of £5 billion to £13 billion) of new money in its current financial year. It also needs to hold on to the money currently in its popular one-year bond, which comes up for maturity later this year.
If NS&I doesn’t come up with a competitive replacement, that money could fly out of the door, leaving NS&I short of its target.
Although the rates on the British bonds are poorer than others in the market, I still think some savers will be tempted. That’s because you can put in between £500 to £1 million and all of it is guaranteed by the government.
This makes the bonds popular with wealthy savers, as banks and building societies cover a lower £85,000 of savers’ cash as part of the Financial Services Compensation Scheme (FSCS), so you can put all your money with NS&I instead of having to spread it around numerous providers and keep tabs on several accounts.
But, if you do go for the British Savings Bonds, watch out for tax. The way they are structured means you do not need to have much saved before you risk incurring a tax bill.
Flexible Isa rules will help savers
The new tax year arrived last Saturday, giving us a new Isa allowance.
You can put another £20,000 into cash Isa savings accounts and all your interest will automatically be tax free.
You have until April 5 next year to use this allowance.
New rules, which came into effect on April 6, mean that you can now open more than one cash Isa in a tax year. This allows you to split your money between fixed-rate Isas and easy-access ones — as long as your provider lets you.
It means that if you open an Isa now with part of your allowance, you can then open another one later in the year.
The onus is still on you to make sure you don’t put more than £20,000 into Isas during the tax year.
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