In the Spring Budget, the chancellor announced the launch of new British savings bonds with the promise of a three-year cash account intended to raise more money for the government. The new products have been launched, so we’ll explain what they are and when you might want to use them.

WHAT ARE THE NEW BONDS?

Despite being branded as ‘British savings bonds’, the money raised will go into the general government coffers in the same way as other investments in NS&I (National Savings & Investments) products.

In reality, the bonds are the same as the previous Guaranteed Income and Guaranteed Growth bonds. They are a three-year fixed-rate cash account paying 4.15% AER (annual equivalent rate) interest a year. You can save between £500 and £1 million in the accounts and the rate is guaranteed for the three years.

One major point to note is there is no option to access your money early. Under previous versions of these bonds, NS&I allowed holders to exit them early if they sacrificed some interest but that is no longer allowed meaning your money is tied up for the full three years with no possibility of exiting early.  

HOW DOES THE INTEREST RATE STACK UP?

The 4.15% interest rate on the British Savings Bonds is a long way from top of the tables. According to MoneySavingExpert, the top provider in the market is Zenith Bank paying 4.67% for its three-year bond. That account lets you pay in between £1,000 and £2 million, so a higher minimum saving than NS&I. If you have a smaller sum to invest, Hampshire Trust Bank pays 4.65% on its three-year bond and the minimum saving is £1.

Before the launch, NS&I admitted it wasn’t planning to be top of the table with this interest rate. It wanted to price the bonds so they’d stick around rather than selling like hot cakes, and this middle-market offering may just do that.

It’s tricky for NS&I to get the interest rate right on these products – too high and they’ll attract swathes of cash and have to pull the accounts from sale, too low and savers will go elsewhere meaning it will have to crank the interest rate up later. 

The bottom line is you will be sacrificing returns in order to save with NS&I, so you need to weigh up whether that is a sacrifice worth making.

Based on the top three-year bond of 4.67%, if you have £5,000 to save you’ll be giving up £26 per year or just over £2 each month in interest by sticking it in British savings bonds. At the maximum savings of £1 million you would be giving up £5,200 in interest per year.  

HOW DO THE INCOME AND GROWTH OPTIONS DIFFER?

If you pick the Income Bond version you’ll get the interest paid into your bank account each month, meaning you can spend it.

This is a good option if you need a regular income to live off, making it ideal for retired people, for example. Someone who invested £100,000 in these bonds would get just over £4,000 of interest each year.

If you don’t need a regular income, pick the ‘Growth’ option, which means the interest is rolled up and added to the bond each year. That way you’ll benefit from compounding, as your interest will earn interest which will help to increase your pot size.

You also need to think about tax. While NS&I’s premium bonds are tax-free, these bonds aren’t which means 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. Once you breach the limit, you’ll pay tax on the interest at your income tax rate.

This means you need to consider two things. Is your money better in an ISA, where it’s protected from tax, and if you do pick the income bond is it better to have the interest paid monthly so it’s spread out and falls into different tax years?

With the growth option, all your returns will be paid out after three years, meaning all the interest falls into one tax year which could take you over your personal savings allowance that year.

DO YOU ACTUALLY NEED GOVERNMENT BACKING?

A big appeal of NS&I is 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 your money is theoretically as safe in any other bank with FSCS protection as it is with NS&I.

However, some people prefer the ‘security’ of having their savings with the government. Also, those with a large amount of savings may prefer to put their money with NS&I rather than split it into separate £85,000 ‘pots’ with different providers. 

‹ Previous2024-04-18Next ›