The government will increase National Savings & Investments’ (NS&I) net financing target by £1.5 billion in the 2024/25 tax year, the chancellor revealed in his Spring Budget.
The target tends to be set by the Treasury just before the new tax year, and used to increase government funds. It currently stands at £7.5 billion.
Jeremy Hunt’s news of a new financing target, hidden in the small print of the Budget documents, could impact future Premium Bond draws and the wider savings market.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The chancellor used his speech to focus on NS&I’s new British three-year fixed savings bond instead.
Mark Hicks, head of active savings at the wealth manager Hargreaves Lansdown, said: “The savings landscape has a new British landmark, with a British Savings Bond from NS&I, which will offer a guaranteed savings rate over three years.”
Find out what the new financing target means for NS&I, how this will impact Premium Bonds, and when the new savings bond will launch.
What does the fundraising target mean for NS&I?
For the current 2023/24 tax year, NS&I’s net financing target sits at £7.5 billion. But from April, this will rise to £9 billion.
This means NS&I will need to raise £1.5 billion more through Premium Bonds and its other savings products.
While the new target looks like a big increase and potentially good news for Premium Bond holders and savers, NS&I might see the target in close reach.
The government-backed savings organisation has already surpassed this year’s target by £3.4 billion, reaching £10.9 billion - which also sprints past the new target set for 2024/25.
The over-achievement comes mainly from the its 6.2% one-year fixed bond, which launched last summer and topped our savings best buy tables.
So, how will this new finance target translate through to NS&I’s Premium Bonds and other savings products?
What does the new finance target mean for Premium Bonds?
The past year has seen NS&I up its Premium Bond prize fund rate again and again, until it reached 4.65% in September - its highest level since 1999.
While the rate stayed put for six months, the provider just this month lowered the rate to 4.4%, which resulted in the value of the prize pot plummeting by £23 million.
From April, NS&I will have a higher financing target, which could push the provider to hike the prize fund rate again, to raise more funds.
But, it’s not that simple.
The fund cut in March was owed to a couple of things, including NS&I already reaching its £7.5 billion target early on this year, taking the pressure off to attract new cash.
Plus, the expectation that the Bank of England could lower the base rate this year has also played a role in NS&I cutting the fund rate.
So, even though NS&I will need to lure in more cash from April, further cuts to the Premium Bond prize fund rate could still be on the cards.
NS&I’s new British savings bond
Since NS&I’s best-buy 6.2% one-year fixed bond was pulled last summer after just five weeks on the market, savers have been closely watching if the government-backed provider will launch any more competitive savings products.
Hunt revealed in the Spring Budget that NS&I is bringing out a new product, namely a British savings bond. It will launch in early April.
NS&I said the product will be a new issue of its Guaranteed Growth Bonds, which were last on the market in 2019.
It will be a three-year fix, with savers able to deposit between £500 and £1 million.
But, the interest rate has not yet been revealed.
“The interest rate offered will need to be carefully thought out by NS&I, considering the current state of the savings market, or it could risk being overlooked,” says Rachel Springall, finance expert at Moneyfacts.
Plus, the three-year period could make this saver unattractive, as Hicks says: “Given this is a three-year bond, it will need to be a very attractive rate to inspire much interest from savers.”
That said, the new bond could be the underdog for NS&I to push it to its £9 billion target if it offers a rate that beats the rest of the savings market, just like the 6.2% bond last year.
Currently, the savings market is offering highs of around 5.2% for an easy-access account and almost 5.3% for a one-year fix. The best three-year savings account pays 4.65%.
This could change depending on what happens with the base rate, when the Bank of England next meets on 21 March, as a cut could mean a dive in savings rates too - which could impact the new NS&I bond rate.
NS&I’s Green Bond
On the market right now is NS&I’s Green Savings Bond, offering 2.95% (far from competitive compared to the rest of the savings market, returning above 5%).
When the Treasury sets out NS&I’s financing target, it usually has a separate ballpark to reach each year from the Green Bond alone.
For example, in the current tax year, NS&I needed to raise £1 billion from its Green Bond. But from the new tax year, this target will split in half to £0.5 billion.
With less of a need to raise more cash through the Green Bond, we can expect to see the 2.95% rate stay put or fall.
How to get free shares worth hundreds of pounds
The best UK shares and funds as FTSE 100 hits new highs
