Should you buy the new NS&I bond?

Tablet with the NS&I website showing
A good deal for easy access and a fixed rate

In last week’s budget, the chancellor, Philip Hammond, announced the details of a new fixed-rate savings bond from National Savings & Investments (NS&I), the UK’s state-sponsored savings bank. The Investment Guaranteed Growth Bond (which, like all NS&I bonds, is a cash deposit rather than a tradeable government bond) will pay 2.2% on balances of up to £3,000 for three years. When the bond was first announced in the autumn statement, Hammond stated that it would pay a market-leading rate. But now the rate has been confirmed, it isn’t as competitive as many had hoped. Although the rate of 2.2% puts the three-year bond at the top of the tables, there are other banks that pay the same rate.

For example, the digital-only Atom Bank pays 2.2% on its three-year bond, with a much higher balance limit of £100,000. With fixed-rate bond rates edging up at present, the NS&I bond may quickly be left behind. In fact, in a few months it may not even keep up with inflation, meaning your money will be shrinking in real terms while it sits in the account. Official forecasts suggest that inflation will hit 2.4% before the end of the year, so it would not take much for the NS&I fixed bond’s rate to be overtaken by inflation.

In these low-rate times, savers have to make sure that their money is at least outpacing inflation. For small amounts, the best way to do this at present is by keeping your money in a high interest current account. For example, Nationwide pays an impressive 5% on its FlexDirect account on balances of up to £2,500 (though this drops to 1% after a year, and you have to pay in £1,000 per month). However, if you are looking for a home for a substantial amount of savings you will probably find the low balance limits on current accounts a problem. This is where fixed-rate bonds can help.

They pay the best rates on savings accounts at the moment – but you need to choose wisely, as you could end up with your savings locked away and lose money when inflation rises. For example, the table-topper at the moment, Atom Bank, pays 2.4% on balances up to £100,000 with its five-year bond, or 2.2% on its three-year bond. But if rates rise, you won’t be able to move your money. Most fixed-rate accounts do not allow any withdrawals until the account matures, with the only exception being in cases of severe financial hardship, which are assessed on an individual basis.

One option for getting a reasonable fixed rate without getting trapped is to take a look at a fixed-rate Isa. By law, cash Isa providers have to give you access to your cash, so you will always be able to make withdrawals. You will usually have to give up some interest, but that might be worth the risk if the rate is high enough. The top-paying fixed-rate Isa is Paragon Bank’s five-year account, which pays 1.75%. But if you want to make a withdrawal, you will sacrifice 365 days’ worth of interest, so rates would have to rise quite substantially to make it worth you taking your money out.

The best solution will often be to split your savings between different accounts, some with easy access and some without. This means that the NS&I bond is still worth considering for part of your cash. The maximum balance is low and the interest rate may be disappointing in the grand scheme of things, but for now it is among the best deals you are going to get for both easy-access and fixed-rate deals. More importantly, it also has a very generous exit policy. If you see a better rate elsewhere, you can withdraw your cash and only sacrifice 90 days’ worth of interest. That is a far lower penalty than other accounts impose on savers. Keep in mind though that the bond is only available for 12 months from April.

In the news this week…

• A paragraph “buried” in last week’s budget hints at the end of the “rent-a-room” tax break for short-term lettings, says Amelia Murray in The Daily Telegraph. The government is to “consult on proposals” to “align the relief more closely with its intended purpose, to increase the supply of affordable long-term lodgings”. Last April, the maximum householders can receive tax-free from renting out furnished rooms in their main home rose from £4,350 to £7,500. There are currently around 52,000 Airbnb hosts in Britain, earning an average of £2,000. If the perk is scrapped, higher-rate taxpayers will suddenly face an £800 tax bill.

• Working parents “face a tough decision next month” with the introduction of a government initiative to help with childcare costs, says Ali Hussain in The Sunday Times. Under the new system the government will contribute 20p for every 80p that parents spend on childcare into a dedicated bank account, with a maximum contribution of £2,000 per child under 12.

For some parents, however, sticking with the existing voucher scheme – which they can still sign up for until April 2018 – makes more sense. Basic-rate taxpayers will be better off under the voucher scheme provided that they spend less than £9,331 a year on childcare, according to financial adviser Wealth at Work, while higher-rate taxpayers are better off with vouchers until childcare costs rise above £6,250.

If you change your employer after April 2018, however, you won’t have the choice of opting for the voucher scheme, so you need to decide quite soon. A new online calculator should make this easier. 

• The government has announced that a crackdown on “subscription traps” will form part of a wider consumer green paper, reports The Guardian. A 2016 survey by the Citizens Advice Bureau found that 84% of the millions of people who signed up to recurring payments failed to realise they had signed up to a subscription, thinking they were merely taking advantage of a free trial or one-off discount. Proposals to end the practice include shorter, clearer terms and conditions and possibly a ban on taking payment details for trials.