When undertaking a comprehensive review of a client’s financial assets, we often find that clients hold one or more products managed by NS&I, or National Savings & Investments in old money.
In today’s fast-moving savings market, NS&I has adapted to offer a more streamlined range of products. Although NS&I’s savings products have unique financial backing, the rates of interest offered can easily be bettered by other providers. In addition, apart from one remaining tax-free option, the tax-efficiency offered by historic NS&I Bonds is no longer available within the existing product range.
Backed by HM Treasury
Originally established in 1861 as the Post Office Savings Bank, NS&I is the UK government savings bank and aims to provide a secure place for individuals to save while helping the government finance public spending. As at September 2024, 24 million customers hold savings products with NS&I, and collectively NS&I manages more than £200 billion on behalf of savers across their range of savings products.
NS&I products are backed by HM Treasury, making them among the safest financial instruments available in the UK. This makes them more secure than typical bank accounts, which are only protected up to £85,000 under the Financial Services Compensation Scheme (FSCS).
NS&I provides funding to HM Treasury, and the Budget in November 2024 outlined the government’s intention to increase the amount of money sought from NS&I deposits, to £12bn for the 2025/26 tax year. This would provide a welcome boost to HM Treasury; however, NS&I needs to balance its role in raising government finance with the need to avoid distorting the wider savings market by offering rates that are significantly higher than competitors. Given the current range of products offered by NS&I, we feel there is little chance of that occurring.
Fixed Rate savings in a crowded marketplace
NS&I Savings Bonds are still the cornerstone of the product range. Interest earned on the current range of Bonds offered by NS&I is subject to Income Tax, which does little to set the products apart from fixed rate Bonds from other banks and building societies. The interest rates currently offered on the flagship British Savings Bonds lag market leading rates by some margin on each of the 1,2,3 and 5-year terms offered, and the only reason for considering NS&I over any other provider is if you want greater protection for deposits over £85,000.
The NS&I Green Savings Bonds offer even worse value. The Bonds currently pay 2.95% gross Annual Equivalent Rate for a 3-year term, which is over 1.25% lower than the market leading rate payable on a 3-year Bond. The ethical credentials of the Green Savings Bond also require closer scrutiny, given the woolly promise that HM Treasury will aim to match deposits into the Bond in chosen green projects.
Other products lag behind
Amongst other savings products offered by NS&I, rates are similarly disappointing compared to other savings options. The NS&I Direct Cash ISA currently pays interest of 3.50% per annum, almost 1% lower than the market leader, and the cash Junior ISA, which allows tax-free savings for those up to the age of 18, pays just 3.55% per annum, again some way behind other providers. Taken in the round, the range of savings products are uncompetitive, and better returns can be obtained by considering options across the marketplace.
Premium Bonds
The only bright spot in NS&I’s current lacklustre product line-up are Premium Bonds. These are NS&I’s most popular product, with over 22 million accounts holding savings up to the maximum £50,000. Premium Bonds don’t pay interest in the traditional sense. Instead, savers are entered into a monthly prize draw with tax-free prizes ranging from £25 to £1 million. This appeals to people who enjoy the “lottery” aspect while keeping their capital safe.
The annual prize fund rate will fall to 3.6% from August, leaving the headline rate below alternative savings options that offer almost instant access; however, given the fact that prizes are tax-free, Premium Bonds may appeal to Higher and Additional rate taxpayers.
Falling interest rates
We feel the current range of products offered by NS&I are disappointing, and apart from Premium Bonds, the rates offered by the government backed institution can be easily beaten elsewhere; however, whilst we would encourage savers to review their NS&I accounts, perhaps a more fundamental review of the level of savings you hold would be a sensible step to take.
UK base interest rates have fallen four times in the last 12 months, and further cuts to interest rates are likely during the autumn, and into 2026, as the Bank of England look to stimulate the stagnating UK economy. Savings rates are, therefore, likely to fall further over the next year, and savers should also be wary of the recent increase in the Consumer Prices Index (CPI), which rose to an annual rate of 3.6% in June, the highest level since January 2024. Savers often ignore the eroding impact of inflation, which coupled with falling interest rates, could mean that deposits lose value in real terms.
As an alternative to medium and longer-term cash savings, a cautiously invested managed portfolio may be an ideal solution to consider for surplus cash deposits. By allocating the largest proportion of the portfolio to fixed interest securities and cash-like instruments, volatility can be kept in check, and adding an allocation to equities can aim to boost returns and provide protection against inflation. A cautious portfolio strategy may also be a sensible option to consider for those who rely on income from their savings.
Selecting the right asset allocation and investment selection is a key component of any successful strategy, and our advisers can take a holistic approach to your savings and wealth and provide independent advice on alternative options where surplus cash deposits are held. Speak to one of our experienced team to start a conversation.
