Millions of NS&I savers will see lower rates of interest paid on their savings from this week onwards. Over £136 billion of cash held with NS&I is affected, with around £25 billion in accounts where the interest has now dropped to virtually nil.

Since lockdown, NS&I has taken in more money than in the previous three years combined, so it’s cutting rates to stop savers beating down its door. The cuts are likely to have a ripple effect on savings rates across the market.

A consumer survey conducted by Findoutnow on behalf of AJ Bell found that 43% of NS&I savers intend to respond to the rate cuts by moving their cash elsewhere. A quarter intend to move to a bank or building society, and a further 5% plan to switch over to a cash savings hub. The latter provide access to savings products from a range
of competitive banks and building societies, all through one online account.

Stocks and shares are also on the radar for some NS&I investors, with 5% in the survey saying they intend to move cash into the market.

What should I do with NS&I savings?

The best course of action if you’re an NS&I saver depends on which kinds of product you’ve got, and how much you value the security of having your money backed by the Government.

The table below shows the changes on variable rate products, and the best comparable rate available on the market as of 16 November 2020 (eight days before NS&I changed rates), according to Moneyfacts data.

Easy access accounts and ISAs

NS&I is now be offering significantly lower interest on its three easy access products – Direct Saver, Income Bonds and the Investment Account. Savers could make hundreds of pounds more a year by switching to another provider with more favourable rates.

Premium bonds

There’s a hefty cut to the interest rate on the Premium Bond prize pool, but it remains higher than the Moneyfacts best buy for easy access accounts right now. On top of that it’s tax-free, so anyone who’s used up their personal savings allowance would need to get an even higher rate from a standard taxable account to match
the post-tax interest from Premium Bonds.

Unlike a traditional savings account, Premium Bond interest is not distributed evenly, so you may get more or less than the interest rate applied to the prize pool, depending how lucky you are.

Fixed term products

NS&I also offers fixed term products which are affected by the interest rate cuts, namely Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates. Once again rates are being cut to way below comparable accounts available
in the rest of the market.

If you hold one of these products, the interest won’t drop until it matures, at which point you can roll over into a new term, but at the new, lower rates.

For those who hold products maturing in the foreseeable future, for the time being you can get better deals by switching your cash elsewhere. The catch is that NS&I is no longer offering these products to new customers, so if it raises rates in future, savers won’t be able to switch back.

For Guaranteed Growth Bonds and Guaranteed Income Bonds, this is probably not a huge issue, but the interest on Fixed Interest Savings Certificates is tax-free, so there may be some value in keeping your cash there simply because of the tax break. This will depend on your personal tax situation, in particular how much of your personal savings allowance you are using, as annual interest payments up to the first £1,000 are tax-free, falling to £500 for higher rate taxpayers and nil for additional rate taxpayers.

In addition if you have some spare ISA allowance which you won’t otherwise use, then there is the possibility of taking the matured cash from Fixed Interest Savings Certificates and putting it into a cash ISA paying better rates of interest, which will also be tax-free.

Security

Savers must consider the high level of financial security provided by NS&I, which is backed by the Treasury. Commercial banks and building societies don’t have quite the same level of protection, though the Financial Services Compensation Scheme covers deposits up to £85,000 in the unlikely event of their bank going bust.

This limit applies per person and per banking licence – for instance HSBC owns first Direct, and so they are treated as the same bank for the purposes of the compensation scheme limit.

In practice, most savers can spread their eggs across enough banks and building societies without breaching the £85,000 limit in any single one.

If you do have that much cash in the bank earning very little interest, it’s worth considering whether the stock market might be more productive in the long term.

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