Spring is in the air, as we edge closer to April. In addition to the looming end-of-tax-year deadline, next month will also see the launch of National Savings and Investments’ (NS&I) much-anticipated British Savings Bond.
But, will it be as sweet as some of its previous savings products?
The government-backed provider is well-known for its Premium Bonds and over the past year, it’s also become a favoured name on the savings scene following its 6.2% one-year fixed bond, which launched last summer.
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While it topped our savings best buy tables, the product was only around for five weeks due to high demand and has since left savers eagerly awaiting NS&I to unveil another savings bond.
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After an eight-month wait, the chancellor finally announced in his Spring Budget the launch of a new NS&I British Bond as he revealed NS&I’s financing target for the new tax year. The provider has confirmed the new bond is set to launch in early April.
But will it be as handsome as last year’s 6.2% bond? We look into what we already know about the new savings account, what we can expect and how it will fit into the wider savings market.
What we know about the new NS&I bond
Each spring, the Treasury sets a net financing target for NS&I to reach by the end of the tax year, with the provider raising funds through Premium Bonds and its savings products.
NS&I surpassed this current year’s target of £7.5 billion by £3.4 billion - mostly down to the success of its one-year fixed bond last year. As a result, the Treasury has bumped up this year’s target to £9 billion which in turn could be good news for savers, as NS&I will need to attract new money.
This is where its new British bond could come into play to help NS&I reach its new target, if it sets an attractive rate. Here’s what we know so far about the new bond:
- The new British bond will be a three-year fixed savings account.
- You can deposit between £500 and £1 million.
- The product will sit under NS&I’s Guaranteed Growth Bonds, which were last seen on the market in 2019.
The biggest difference compared to its last bond offering is that savers will be required to fix their cash for three years, which Sarah Coles, head of personal finance at Hargreaves Lansdown says is “simply too long for a lot of people to consider putting their cash away for”.
It follows more household bills rising such as broadband and council tax bills, which means savers who are strapped for cash will prefer fixing their cash for a short period, or opting for an easy-access account.
The demand for three-year fixed bonds is also low compared to one or two-year fixed savers. Data from Moneyfacts shows that today (27 March) there are only 101 three-year fixed bonds. This compares to 202 one-year fixed savers and 161 two-year fixed bonds.
That said, those who have a large sum to save might be attracted to the fact that the bond will allow you to save up to £1 million, as the full sum will be protected by the government. Whereas in a typical savings account, only up to £85,000 is protected by the Financial Services Compensation Scheme (FSCS).
Overall, the information available regarding the new bond is quite limited despite being weeks away from its launch – and the big question still remains, what will the interest rate be?
What rate can we expect on the NS&I bond?
According to Moneyfacts, the average rate on a three-year fixed bond stands at 4.15% as of today (27 March). MoneyWeek has also been tracking the best savings rates and can reveal that Zenith Bank offers the top three-year fixed saver, at 4.67% AER.
This compares to the top one-year fixed savings account returning up to 5.23% AER and the best two-year fixed bond offering 5.11% AER, which is quite a significant difference of around 0.5 percentage points.
Based on this, we could expect NS&I to either set its rate mid-market so it competes closely with other products in the market, or as it did with its one-year fixed bond, the provider could beat it and offer a more attractive return.
But Coles says: “Given that there are a handful of three-year deals on the market paying 4.65% or more, there’s every chance that the NS&I bond comes in around the 4% mark,” making one or two-year fixed rates look more desirable.
That being said though, the longer you fix means your rate won’t be affected by any market movements, which is good news in one sense, as experts predict the base rate is set to fall as early as June, pushing savings rates down too.
While that’s what experts are betting on now, it’s anyone’s guess what could happen with interest rates three years down the line, as it will depend on the state of the economy. So, if for any reason rates go higher than what they currently are within the three-year period, savers could potentially miss out.
It will also be interesting to see when the interest is paid - most three-year fixed-rate bonds pay interest annually, but some accounts pay it interest quarterly or monthly.
If a large amount of interest is paid annually, or if the whole lot is paid at the end of the term, this could push you over your personal savings allowance (PSA), resulting in you paying tax on the interest earned.
For example, if you earned the average three-year fixed rate of 4.15% and saved £10,000, at the end of the fixed term you would end up with £1,245. So, a basic-rate taxpayer whose PSA is £1,000 would end up paying interest on £245. And a higher-rate taxpayer whose PSA is £500 would end up forking out tax on £745.
Taking it a step further, savings of £20,000 over three years would mean a basic-rate taxpayer would have to pay tax on £1,490, and a higher-rate taxpayer would have to pay tax on £1,990.
If you’re worried about paying tax on your interest, it might be worth considering a fixed-rate cash ISA instead, as you can deposit up to £20,000 each tax year and any interest earned is tax-free.
