NS&I doubles rate to lure in more green savers

After what must have been a lacklustre response to its initial launch, NS&I has revamped its Green Savings Bond and more than doubled the interest on offer to savers. While it’s still below the top rate in the market for three-year fixed rate bonds, which stands at 1.86% currently*, it’s far more competitive than the first issue of the bonds.

Since the Green Bonds launched in October the Bank of England has increased rates by 0.4 percentage points, which in turn has pushed up average fixed-term rates. NS&I points to this rising interest rate environment as the reason for doubling the rate from 0.65% to 1.3%. However, what’s more likely is that the initial launch, which at the time offered the same interest rate as an easy-access current account, went down like a lead balloon and NS&I had no choice but to raise the rate to draw in more money and reach its funding targets.

One group of savers who will understandably be disgruntled are those who signed up to the initial Green Savings Bond, who will be locked in to earning 0.65% for the next three years. The bond has an initial 30-day cooling off period, where people can get their money back, but once savers are past that point they can’t withdraw the cash for three years – so will have missed out on earning double the interest. If someone invested £10,000 they will make almost £200 less in interest over the three year period if they signed up to the first issue of the bond rather than the second. If they had £50,000 invested that difference jumps to almost £1,000.

While the rate increase is a vast improvement, savers are still sacrificing returns in order to invest in a ‘green’ way and to have the backing of the UK Government. If someone invests £5,000 in the new savings bond they will generate £198 interest over the three years, but if they saved in the current top-rate three-year account* they’d make £87 more interest over that time. That is a significant reduction on the £350 penalty savers would have taken if they invested in the Green Bonds at launch last October, compared to the top rate equivalent account at the time.

However, anyone signing up to a long-term fix needs to think carefully about what they think interest rates will do during that time. We’ve already had two interest rate rises since the bonds’ launch and the Bank of England expects rates to hit 1.25% before the end of the year, although this is by no means certain. But that would mean an uptick in savings rates too, in both the easy-access and fixed-rate market. If you lock money away now you’ll miss out on those potential increases.

*Based on Moneyfacts data, top three-year fixed rate account is 1.86% from Al Rayan Bank. Rate available as of 15/02/22. Assumes compounding of interest on both accounts.