Should you buy the new NS&I bond?

Ruth Jackson looks into whether you should put your money into the new fixed-rate savings bond from National Savings & Investments (NS&I).


A good deal for easy access and a fixed rate

In last week's budget, the chancellor,Philip Hammond, announced the detailsof a new fixed-rate savings bond fromNational Savings & Investments (NS&I),the UK's state-sponsored savings bank.The Investment Guaranteed GrowthBond (which, like all NS&I bonds, isa cash deposit rather than a tradeablegovernment bond) will pay 2.2% onbalances of up to £3,000 for three years.When the bond was first announced inthe autumn statement, Hammond statedthat it would pay a market-leading rate.But now the rate has been confirmed, itisn't as competitive as many had hoped.Although the rate of 2.2% puts the three-year bond at the top of the tables, thereare other banks that pay the same rate.

For example, the digital-only Atom Bank pays 2.2% on its three-yearbond, with a much higher balance limitof £100,000. With fixed-rate bond ratesedging up at present, the NS&I bondmay quickly be left behind. In fact, in afew months it may not even keep up withinflation, meaning your money will beshrinking in real terms while it sits in theaccount. Official forecasts suggest thatinflation will hit 2.4% before the endof the year, so it would not take muchfor the NS&I fixed bond's rate to beovertaken by inflation.

In these low-rate times, savers have tomake sure that their money is at leastoutpacing inflation. For small amounts,the best way to do this at present isby keeping your money in a high interestcurrent account. For example,Nationwide pays an impressive 5% onits FlexDirect account on balances of upto £2,500 (though this drops to 1% aftera year, and you have to pay in £1,000 per month). However, if you are lookingfor a home for a substantial amount ofsavings you will probably find the lowbalance limits on current accounts aproblem. This is where fixed-rate bondscan help.

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They pay the best rates onsavings accounts at the moment butyou need to choose wisely, as you couldend up with your savings locked awayand lose money when inflation rises.For example, the table-topper at themoment, Atom Bank, pays 2.4%on balances up to £100,000 with itsfive-year bond, or 2.2% on its three-yearbond. But if rates rise, you won't be ableto move your money. Most fixed-rateaccounts do not allow any withdrawalsuntil the account matures, with theonly exception being in cases of severefinancial hardship, which are assessed onan individual basis.

One option for getting a reasonable fixedrate without getting trapped is to takea look at a fixed-rate Isa. By law, cash Isa providers have to give you access toyour cash, so you will always be ableto make withdrawals. You will usuallyhave to give up some interest, but thatmight be worth the risk if the rate is highenough. The top-paying fixed-rate Isa isParagon Bank's five-year account, whichpays 1.75%. But if you want to make awithdrawal, you will sacrifice 365 days'worth of interest, so rates would have torise quite substantially to make it worthyou taking your money out.

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.

Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.