National Savings takes the axe to interest rates

National Savings & Investments (NS&I) has announced interest rate cuts to most of its products.

If NS&I did not exist, it is hard to imagine that it would be invented now. Once upon a time, it was a useful way for the government to raise cheap money from the general public, whereas today it is exactly the opposite.

If HM Treasury needs to borrow – as it always does – it can raise billions by selling government bonds (gilts) to institutional investors at an interest rate of under 1%. For example, at the time of writing, the yield on ten-year gilts was just 0.47% – less than one third of January’s 1.8% inflation rate.

With such low-cost money available in wholesale amounts, it was not surprising that in February NS&I announced a raft of interest rate cuts, all to take effect from 1 May 2020:

The premium bond changes mean that from May, 98.95% of all winning draws will be for the minimum prize of £25. However, as the table shows, the underlying prize interest rate for premium bonds is markedly better than what NS&I is offering on its other variable rate products. Indeed, if your interest income exceeds your available personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers) and you have used your £20,000 ISA allowance, the likely meagre returns on premiums bonds are relatively attractive.

NS&I also lowered the rates on their fixed rate products – Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates. These are not on general sale and are only available for reinvestment of maturing plans.

NS&I’s move can be expected to encourage another round of cuts among deposit-taking institutions, even though the Bank of England rate has remained unchanged since July 2018. If you need income from your savings, then you must either resign yourself to these ultra-low rates or accept some risk to capital. For example, the average yield on UK shares is now about 4.3%.

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