03 Nov 2009

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The best one-year savings product

by admin

Good news for savers this week. National Savings and Investments (NS&I) shocked other banks and building societies by launching a market beating savings product.

NS&I had a good 2008. First, the collapse of Northern Rock sent savers running for the safety of an HM Treasury guaranteed account. Then, in October 2008, Lehman Brothers collapsed and panicking savers pushed £10bn more into NS&I’s coffers. But in the last six months, customers have been deserting NS&I due to its pitiful interest rates. Now that is about to change once more.

A market-topping one-year bond

That’s because the bank’s new one-year fixed-rate growth bond has shot straight to the top of the best-buy tables with a rate of 3.95%AER. That’s 0.2% above the next best account from the State Bank of India, according to Moneyfacts. And, unlike most banks and building societies – where only the first £50,000 of your money is guaranteed by the Financial Services Compensation Scheme – all money up to the £1m account maximum is guaranteed by the government. So anyone looking to invest a large sum for one year should opt for this bond.

NSI two-year bonds are good, but not great

NS&I has also increased rates on its longer-term bonds, but unfortunately none are market beaters. For example, the two-year fixed growth bond offers 4.25%AER, which is good, but not good enough to beat the AA’s 4.35% return on its two-year bond. Although the increased security offered by NS&I, offered in return for 0.1% less interest, may still sway investors looking for a home for large amounts of money.

But why the sudden rate improvement from NS&I? This has come about largely because NS&I is changing the way it determines interest rates. In the past they were set with reference to a mix of gilt (government IOU) yields and the Bank of England base rate. But this meant that over the past year NS&I’s rates plummeted, causing customers to leave.

With the Treasury short of cash, the brains at NS&I have changed the way they calculate rates to include a broader mix of benchmarks, allowing them to raise the bar and draw in new customers.


The trouble is, if its interest rates are too attractive, “it could mop up the country’s savings balances and further weaken the banks and building societies that are desperate for inflows,” say Patrick Collinson and Miles Brignall in The Guardian. That explains why only one of their new accounts offers market-beating rates.

But the five-year bond is worth a look

However, NS&I also offers a decent long-term product.

If you are prepared to lock up your money for five years, NS&I isn’t competitive at first glance. Its five-year fixed rate growth bond pays 4.6%AER, whereas Skipton Building Society offers 5.35%. However, the Skipton account doesn’t allow early withdrawals, so you could be left behind if interest rates rise. NS&I on the other hand allows early withdrawals, subject to 90 days’ interest being forfeited. So at least if interest rates rise sharply you can escape and get a better deal. If you know you won’t need your money in a hurry, I would open this account now, but be prepared to abandon ship later.

Where to grab the best Isa rate

If you haven’t yet used up this year’s individual savings account (Isa) allowance, NS&I offers 2.5% on its instant access account. That’s competitive, but if you are prepared to give a little notice before you want your money, Chesham Building Society offers 3.25% on its 180-day notice account, and 3% in return for 120 days’ notice.

The bad news about NS&I’s products is that you can no longer apply for them at the Post Office. It announced last week that you can now only apply by phone, using freepost, or online. But that’s an inconvenience worth putting up with for a market beating, and 100% secure, savings account.

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