Scrooge-like NS&I announces Christmas rate cuts

NS&I will be cutting the rates on a few accounts, including the ever-popular Premium Bonds from the January draw. But also the Direct Saver and Income Bonds easy access accounts from 20th December.

Andrew Westhead, NS&I Retail Director said "We carefully review our savings rates in response to changes in the broader market. These adjustments help us meet our Net Financing target while balancing the interests of our savers, taxpayers and the wider financial services sector.”

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Why is NS&I cutting rates now?

Unpicking this statement, there are a number of reasons that these rate cuts are happening. The most obvious reason is that the base rate was cut by 0.25% at the beginning of December.

But it could also be because according to its latest unaudited financial results that show the state bank is on target to meet its current Net Financing Target.

As a government department, each year NS&I is given a target of the amount of money it needs to raise – and for the current tax year this is £9 billion – give or take a leeway of £4 billion each way.

At the end of the 2nd quarter of 2023/24 it has raised a net amount of £3.3bn. That said, whilst this means NS&I is within the margins of the target, it is a little under the actual target, which makes this decision all the more disappointing.

Are Premium Bonds worth keeping?

This week’s announcement means that there will now be two cuts in two months, as we had already been notified that the rate on the Premium Bond Prize fund was to drop to 4.15% for the December draw – but this week’s announcement means that the rate will be cut again, to 4%, from the January draw.

However, NS&I has confirmed that the odds of each bond winning a prize has remained at 22,000 to 1. They have achieved this by increasing the number of £25 prizes, while cutting the number of some of the bigger prizes. However, there will continue to be two chances to win £1m each month!

Although disappointing, it’s not likely to cause too much of an exodus as there are still many reasons for savers to keep their Premium Bonds.

Firstly, it’s simply the ‘what if’ factor! There is that frisson of excitement each month; what if I were to win one of the big prizes!

And for taxpayers although on the face of it, the rate of 4% looks less competitive as you can earn up to 4.85% on an Easy Access account, if you pay tax on your savings interest, you’d be hard pressed to find an equivalent savings account paying as much.

For example, if you were to win the equivalent of the new prize fund interest rate of 4% tax free, as a basic rate taxpayer this rate is the equivalent of earning 5% on a taxable easy access account, 6.67% if you are a higher rate taxpayer and 7.27% for additional rate taxpayers!

How will the new easy access rates compare?

From 20th December, NS&I has announced that the rate for Direct Saver will fall to 3.50% gross/AER, from 3.75% and the monthly paying Income Bonds will fall to 3.44% monthly/3.49% AER, from 3.69% monthly/3.75% AER. Whilst this rate cut is in line with the recent base rate fall of 0.25%, it’s still disappointing, especially as these new rates are far lower than base rate, which is now 4.75%.

More importantly, there are plenty of other easy access accounts that are paying more than this.

You could earn up to 4.65% AER in an unlimited easy access account. The Family Building Society Market Tracker Saver (1) can be opened in branch, online, by post or telephone and is offering an annual income rate of 4.65% AER on balances of £500 or more. If you don’t need unlimited access and are happy to open your account online, the Principality Building Society Online Bonus Triple Access Issue 4 is paying 4.85% - but as the name suggests you can only make three withdrawals a year, which includes closing the account.

If you want monthly interest, it’s a little harder to beat if you need to open your account by post or telephone. However Vanquis Bank’s Easy Access Account (Issue 4) is paying 4.55% monthly interest/4.65% AER but this account needs to be opened online.

Kent Reliance’s Easy access savings account issue 75 can be opened in branch or online, and is paying 4.27% monthly/4.35% AER.

As this illustrates, for many people, switching would be a wise thing to consider if you want to have more pounds in your pocket.

That said, while the rates may not be the very best you can earn, NS&I is often considered the gold standard when it comes to protection of savings, and it's not hard to see why. As an institution, NS&I is unique because it is fully backed by HM Treasury. This government guarantee means that 100% of any money you invest with NS&I is safe, no matter how much you save. But, other banks or building societies, are protected by the Financial Services Compensation Scheme (FSCS) up to a limit of £85,000 per person per institution, so for those with less than £85,000 or prepared to open multiple accounts, NS&I may not be the first choice.

The advent of cash savings platforms has also added another option for those with larger amounts of cash.

Think of a cash savings platform like a savings supermarket, where with a single application and log-in, you can pick and choose multiple competitive savings accounts - from easy access to fixed term bonds - and providers at the click of a button. Whilst not whole of market, cash platforms do make it easier to spread your cash, so that it can be better protected by the Financial Services Compensation Scheme (FSCS).

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash advice or tax.

The accounts and rates mentioned in this article are accurate and correct as of 04/12/2024.