- Two-year British Savings Bonds rate cut from 4.6% to 4.25% AER interest
- Five-year British Savings Bonds rate cut from 4.1% to 3.9% AER interest
- Rate cut comes a month after the bonds were relaunched
- Three-year bond rate falls to 4%
- Income and Growth versions of the bond on offer
- You can save from £500 up to £1 million
Laura Suter, director of personal finance at AJ Bell, comments on the interest rate cuts to the NS&I British Savings Bonds:
“Just a month after re-launching the British Savings Bonds and putting them back on sale, NS&I has cut the rates on offer on the products. The two and five year bonds were launched in August and have clearly proved so popular that NS&I has chopped the rates.
“During the past month many savings providers have cut the rates on offer to customers, in anticipation of a lower Bank of England base rate in the coming months. This means that NS&I doesn’t have to be as competitive with its rates – leading to the cut.
“The top two-year fixed rate account in the market pays 4.72%, compared to the 4.25% on offer from NS&I. It’s the same case with the five-year bonds, where the market leader is paying 4.36%, compared to the 3.9% from the British Savings Bond. On the two-year version of the bond you’d be sacrificing nearly £50 a year interest on £10,000 saved, which some savers may feel is a sacrifice worth making. It’s a challenge for NS&I to strike the right balance with interest rates on these products: set them too high and they’ll be flooded with cash, forcing them to withdraw the accounts from sale; set them too low, and savers will look elsewhere, leaving NS&I to hike the rate down the line.
“Despite the interest rate cut, these accounts are likely to continue 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 watch out to avoid an unexpected tax bill with these accounts. While Premium Bonds from NS&I are tax-free, British Savings Bonds are not, meaning you may owe tax on the interest if you exceed your Personal Savings Allowance. With the growth version of the bond, all the interest is taxed when it’s paid out at the end of the term, which could push you over your tax-free allowance. In this case, the Income version might be a better choice, as it pays out interest monthly. However, you won’t enjoy the benefits of compounding in this account."
Three things to consider before buying
- Pick whether you want the interest now or later: If you pick the “Income Bond” version you’ll get the interest paid out each month into your bank account, meaning you can spend it. This is a good option if you need the income each month to live off – so ideal for retired people, for example. However, if you don’t need the income the “Growth” option means the interest is rolled up and added to the bond each year. Although you can only access it at the end of the fixed term. Bear in mind your tax situation though.
- Remember the tax bill: While NS&I’s Premium Bonds are tax-free, these bonds aren’t. It means that you could pay tax on the interest you earn. The Personal Savings Allowance gives most people a tax-free limit for the interest they can earn on their savings before they’re taxed. It currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional rate taxpayers get no tax-free allowance. It means that once you breach the limit you’ll pay tax on the interest at your income tax rate. If you’re likely to face a tax bill for the interest you might want to weigh up whether an ISA would be better for your cash savings.
- NS&I is government-backed, but do you need that? A big appeal of NS&I is that they are backed by the government, so they are seen as the safest place to keep your money. However, other banks and building societies are protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with NS&I. But regardless some people will feel much safer with their savings being with the government. Plus, anyone with a large amount of savings may prefer to put their money with NS&I rather than split it into £85,000 pots with different providers.
