October Magazine Column
09/10/2020
NS&I announce savage rate cuts
The big news in the savings market is the announcement from National Savings & Investments (NS&I) of a round of interest rate reductions across their product range, which came at the end of September.
While regular readers will not be surprised at the news, given it’s a topic I’ve covered frequently since cuts announced in February were cancelled due to the impact of Covid-19, what was a shock was the severity of the cuts. Income Bonds, Direct Saver and Direct ISA have all sat at the top of the best buy tables. It was only a matter of time before they had to either decrease rates or announce an increase in their net financing target (the amount HM Treasury ask them to raise each year), because inflows were so strong as a result of their position in the tables.
In the five months between April and August this year, NS&I have taken in net savings balances of £33.2bn against their target for the whole of their 2020-21 financial year of £35bn. To put this in to context, that’s more than the savings balances combined of Metro, Aldermore and Shawbrook – three of the largest new entrants to the market who have spent the past decade growing.
While the reductions were not a surprise, what was a shock was just how savage the cuts are going to be. The following changes to NS&I rates come into effect from 24th November 2020:
|
Product |
Current interest rate AER |
New interest rate |
|
Direct Saver |
1% |
0.15% - down 0.85% |
|
Investment Account |
0.80% |
0.01% - down 0.79% |
|
Income Bonds |
1.16% |
0.01% - down 1.15% |
|
Direct ISA |
0.90% |
0.10% - down 0.80% |
|
Junior ISA |
3.25% |
1.50% - down 1.75% |
The Premium Bond prize fund will also be reduced to 1% (from 1.40%) at the same time.
What action should NS&I savers take?
Clearly, with cuts of such magnitude, savers will need to look at alternative options, so here are my recommendations on what savers should do:
Premium Bonds – stay put
Direct Saver – move
Investment Account – move
Income Bonds - move
Direct ISA - move
Junior ISA - move
Premium Bonds
Although the cut of 0.40% is severe, Premium Bonds remain very competitive in the market. The best easy access accounts, excluding NS&I, are currently around 0.90 – 0.95% so Premium Bonds compare very favourably still. If you hold £5,000+ in Bonds and your reasons for saving in them are to get a couple of prize cheques of £25 per annum, with the excitement of potentially getting something bigger, then it’s worth sitting tight.
If you hold less than £5,000, it’s unlikely you will see more than one prize a year, and holders of under £2,500 are unlikely to get that. If you want a return on your money, it may be worth looking at other easy access options.
Direct Saver, Investment Account and Income Bonds
These accounts are all dropping to levels well below those available in the market and holders wanting better returns should definitely look elsewhere.
Savers wanting easy access should look at Coventry Building Society who are paying 0.96% on their online ‘double access’ saver, which allows two penalty free withdrawals per year, or Yorkshire’s Internet Saver which pays 0.95% on balances of £10,000 and allows unlimited withdrawals.
For postal account holders, the options are not as good with a lower rate of 0.70% from Kent Reliance, Al Rayan Bank and Chorley Building Society.
Those who don’t want to shop around regularly should consider Family Building Society’s ‘Market Saver’ which currently pays 0.67% but is reviewed every quarter to keep it competitive with the best accounts in the market, to save you doing the work yourself.
Savers prepared to tie up for longer should look at Aldermore’s 120 Day Notice account paying 1.10% and their 1 Year Fixed Rate also at 1.10%.
Direct ISA
The decision for Direct ISA holders is made easier by the fact that there are already better options elsewhere with Coventry Building Society’s Triple Access Saver paying 0.96% or Yorkshire’s 0.91% for those with £10,000+ and wanting unlimited access. Postal account holders and those not wishing to shop around should look at Family Building Societies ‘Market Tracker ISA’ paying 0.72%, which is reviewed quarterly to keep the rate competitive in line with the market.
Junior ISA
Junior ISA holders should look at Coventry Building Society, who pay 2.95% and have consistently topped our best buy tables since 2017, with NS&I only recently overhauling them. Their long term track record of paying the best rates in the market, and the fact their rate is almost double the new NS&I one, make them worthy of consideration.
New banks are coming!
It’s been a busy few days in the new entrant banking market with DF Capital becoming authorised, JN Bank launching and Monument becoming authorised with restrictions – in plain English terms this means they will now complete and test their bank before full launch. I expect more announcements later this month. It’s worth keeping an eye on our website, or signing up for our email newsletter, as often new entrants pay some of the best rates at launch to entice new savers in.