For anyone looking for the best home for their savings, you may be wondering whether it's worth going with a bank or building society - or the government-backed National Savings & Investments (NS&I). If this sounds like you, our NS&I comparison is here to help.
NS&I offers Premium Bonds as well as cash ISAs and easy-access savings accounts. It has also previously offered one-year savings bonds, which paid a market-leading 6.2%. But these were pulled in October after huge demand.
Savings rates are starting to fall now, in anticipation of the Bank of England cutting interest rates later this year. Metro Bank recently dropped the rate on its top-paying easy-access savings account, from 5.22% to 4.51%.
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NS&I has also announced it will cut the Premium Bond prize fund rate in March from 4.65% - its highest rate since 1999 - to 4.4%. February's winners have just been revealed.
In light of the falling rates, savers may be feeling confused about which savings provider and account to plump for right now. We put NS&I to the test against other providers to explain the pros and cons and help you make the best decision for your money.
What are the interest rates like with NS&I?
NS&I is most famous for its Premium Bonds, but it also offers cash ISAs, easy-access savings accounts, junior ISAs and green savings bonds. It previously offered one-year bonds but these are currently not on sale.
Its ISA - which is easy-access, and called the Direct ISA - pays 3%. Its Direct Saver account - an easy-access savings account that pays interest annually - pays 3.65%. Its Income Bonds, which is the same as the Direct Saver except it pays interest monthly, has a lower rate of 3.59%.
None of these are chart-topping. The reason for this is that NS&I has to deliver value for taxpayers, so its focus is not solely focused on delivering the best returns for its customers. There are still many easy-access ISAs and savings accounts that pay above 4%. Remember, the Bank of England base rate is currently held at 5.25%.
NS&I's junior ISA pays 4%, which seems like a decent rate. However, quite a few building societies beat this rate. But, unlike NS&I, you can't open most of these online. For example, Coventry pays 4.95% and Loughborough pays 4.8%.
So, as things stand, none of NS&I's savings rates are market-leading, and you can potentially earn more interest by going with a competitor.
What else do I need to consider with NS&I?
There are three big benefits of saving your cash with NS&I. Firstly, its savings accounts often have higher maximum balances than other banks and building societies.
For example, savers can hold up to £2 million in NS&I’s easy-access Direct Saver account. Compare this to Cahoot’s Simple Saver account, paying 4.1%. While the account has a maximum deposit of £2 million, you can only earn 4.1% on balances up to £500,000. No interest is earned on any sum above £500,000.
So, for those with a large chunk of money that needs a savings home, an NS&I account could be ideal.
The second advantage is that NS&I is basically part of the government. This means it guarantees that 100% of your money is safe, as it has the unique backing of the Treasury.
Savers do not need to worry about the limits of the Financial Services Compensation Scheme, which pays compensation of up to £85,000 per person per institution to cover any losses if a bank or building society goes bust (you should always check before you bank anywhere that it is protected by FSCS as some banks may not be).
You can save as much money as you like with NS&I, subject to any restrictions on the actual products, and know that all your cash is protected.
Third, if you're worried about paying tax on your interest, and have already maxed out your cash ISA, NS&I has a unique tax-free savings product. The prizes you win with Premium Bonds are completely tax-free. While you may not win any prizes (but you could also win the £1 million jackpot), you can be sure that HMRC won't take any of the cash.
Aside from Premium Bonds and cash ISAs, all savings accounts are subject to tax. Higher-rate and additional-rate taxpayers could be caught out due to rising interest rates - find out how savings tax works in Beware the savings tax trap.
Are there any drawbacks with NS&I?
One of the drawbacks with NS&I is that it does not often offer the best saving rates. It has to balance the interests of savers, taxpayers and the government. So, customers should beware of relying on and trusting NS&I to offer competitive rates, as sometimes that is not the case.
“For the vast majority of the time, NS&I applies the time-honoured rule that it wants to offer something in the middle of the pack, so it attracts enough cash, but without paying over-the-odds for it,” remarks Sarah Coles, head of personal finance at the investment platform Hargreaves Lansdown.
Someone choosing NS&I’s Direct ISA, currently paying 3%, would be leaving an extra 2.09% of interest on the table by not picking the market-leading cash ISA (Moneybox, 5.09%).
Having said that, NS&I’s fixed bonds paying 6.2% were clearly a departure from this rule. So, if you spot a market-leading product from NS&I that you like the look of, be sure to snap it up quickly, as it's unlikely to be around for long.
Another drawback for some savers is that NS&I does not offer any sort of physical presence on the high street. Other banks and building societies have branches - although many are closing - which provides some peace of mind if a customer wants to walk in and talk to a member of staff.
In addition, NS&I increasingly runs its savings products online, so it is not always possible to manage them on the phone or by post. The green savings bond and junior ISA are both designed to be opened online, meaning savers without internet access may lose out.
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