Thousands of savers will see their NS&I British Savings Bonds mature over the coming weeks.
The one-year bonds – which came in Guaranteed Growth and Guaranteed Income versions – were on offer exclusively to existing customers between 30 August and 5 October 2024. They paid 4.75% AER.
NS&I’s British Savings Bonds now pay a lower rate of 4.18%.
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Customers will receive reminders 30 days in advance of their fixed-term bonds maturing, which means some will have already got reminders.
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Many of them would have had an NS&I one-year savings account before opening their current one.
More than 225,000 customers bought NS&I’s one-year Guaranteed Growth and Guaranteed Income bonds back in 2023, when they paid between 6.03% and 6.2%. This was the highest ever interest rate offered on these products.
They were on sale between 30 August and 5 October 2023. Many customers would have then rolled over to the current bonds that are starting to mature.
About 486,000 people have a British Savings Bond, as at 31 March, although NS&I said it was unable to say how many of them have the ones that are coming to an end now.
Nonetheless, there's likely to be a large number of savers who will be wondering what to do with their cash that was previously locked up in a one-year savings account.
Anna Bowes, personal finance expert at The Private Office, tells MoneyWeek: "Two years ago, NS&I made an uncharacteristic move and launched a market-leading one-year bond paying 6.2% AER. Understandably it was extremely popular.
“This time last year, the rate NS&I was offering to its maturity customers was still a competitive deal – especially considering the government-backed security it came with. As a result, NS&I likely retained a lot of this maturing cash.”
We take a look at the options: should savers stick with NS&I or switch to a competitor, and which type of account might be best?
Should you stick with NS&I?
NS&I cut the interest rate on its British Savings Bonds several times last year, bringing it down from 4.75% in August to 3.95% by December.
However, it then increased the rate this year, raising it to 4.05% in April and then to 4.18% last month.
So, for anyone tempted to stay with NS&I, the growth bond currently pays 4.18%, while the monthly income option pays 4.11% gross / 4.18% AER.
This compares to a 4.75% rate that savers would have got a year ago.
Bowes notes that while the current rate is higher than the 4.05% on the previous issue, “it looks underwhelming compared to what’s currently available elsewhere, so savers may be tempted to walk”.
The top 10 one-year savings bonds all pay more than 4.3%. The top payer, JN Bank, has a one-year fixed savings account paying 4.39%, according to Moneyfactscompare.co.uk.
The next best, Tandem Bank, offers a 4.37% rate.
Bowes calculates that savers with £50,000 to lock away could earn £2,195 (before the deduction of tax) in interest by choosing a top-paying account, compared with £2,090 with NS&I – a notable difference of £105 over the year.
Adam French, head of news at Moneyfactscompare.co.uk, comments: “For savers who prefer the security of NS&I, its new one-year bond paying 4.18% offers a reasonable rate of return.
“While it doesn’t top the best-buy charts, it still outpaces current inflation forecasts making it less likely savings are going to lose value in real terms. However, those willing to shop around and commit to another fixed-term bond could secure returns closer to 4.5%.”
The interest rate is only part of the decision though. NS&I has an advantage over other savings providers in that it is backed by the government, so savers do not have to rely on the Financial Services Compensation Scheme (FSCS).
The scheme guarantees savings of up to £85,000 per person, per banking licence, should the bank or building society go bust. So, if you have a larger sum than this to put in a savings account, NS&I can be an attractive place to deposit your money. You can save up to £1 million in Guaranteed Growth and Income bonds.
The extra security – which basically guarantees 100% of your cash – could be a price worth paying to offset a lower interest rate.
Should you fix for longer?
Some savers may be wondering whether they should fix for longer than one year, especially as the Bank of England has been cutting rates and it looks likely we’ll see another cut either later this year or early next year.
Bowes comments: “The top five-year bond is paying 4.52% at the moment, from JN Bank. This is the highest five-year rate we've seen for months.
“The overall trajectory [of rate cuts] is still downwards. If rates do fall, you might be glad a year from now that you locked in today’s higher rates for the long term.”
In fact, JN Bank offers the best four-year (4.35%), three-year (4.45%), and two-year (4.41%) rates on the market right now.
The bank is part of Jamaica National Group and is regulated by the Financial Conduct Authority and protected by the FSCS.
According to French, any of the top 10 one-, two-, three- and four-year fixed savings accounts are paying more than the NS&I bond at the moment.
However, if you think you’ll need access to your money in the short term, and don’t want to tie it up for a year or more, an easy-access savings account is likely to be your best bet.
The top rates on offer are Chase (4.75%) and Revolut (4.5%), according to Moneyfactscompare.co.uk.
However, do watch out for the small print – many of the top-paying easy-access accounts come with various limitations – and beware that rates can change at any time.
Watch out for tax
While NS&I is a trusted brand that protects 100% of your money, savings account customers are still liable for tax.
Although NS&I’s Premium Bonds pay out tax-free prizes, and cash ISAs are of course tax-free, NS&I’s other products are subject to tax, in the same way other bank and building society savings accounts are.
French comments: “For anyone with maturing bonds, it is important to consider their personal saving allowance – particularly if they are a higher-rate taxpayer. Interest earned above £1,000, or £500 for higher-rate taxpayers, is subject to income tax, which can quickly erode the benefit of chasing the best rates of return.
“As a result, securing a top-paying cash ISA is increasingly appealing, with its tax-free wrapper ensuring every penny of interest earned is kept out of HMRC’s reach.”
Many of the top one-year fixed cash ISAs are paying a better rate than the NS&I bond. For example, Vida Savings and Shawbrook Bank both offer 4.31%. This compares to 4.18% if you roll onto another NS&I bond.
Cash ISAs come with the perk of a tax-free wrapper, but watch out for the £20,000 ISA limit per tax year.
If you have more to save, you could take a “mix and match” approach, using an ISA plus a taxable savings account – which could include the British Savings Bond if you have very large sums to save and want the security of NS&I's Treasury-backed guarantee.
