“I’m a Money Expert – 6 Things to Consider Before Opening New NS&I Savings Accounts” | Personal Finance | Finance

NS&I launched two new savings bonds this week, but experts warned savers “must be careful” before investing.

For the first time in 15 years, NS&I is offering two- and five-year UK savings bonds, which analysts predict will “sell quickly” given past popularity trends.

UK Savings Bonds are fixed maturity bonds that form part of NS&I’s Guaranteed Growth Bond and Guaranteed Income Bond portfolio.

Accounts vary in terms of when and how interest is paid.

Guaranteed Growth Bonds require a lump sum investment that pays a fixed interest rate over a set period. These accounts are designed to be held for the entire term. Interest is compounded daily and added to the bond on each investment anniversary.

Guaranteed Income Bonds are accounts that require a one-time investment and provide a monthly income at a fixed interest rate for a specified period. Interest is calculated daily and paid into the customer’s designated bank account.

The first of two new fixed accounts on offer, the two-year Growth option offers savers 4.6 per cent gross/AER, while the Income option offers 4.50 per cent gross/4.60 per cent AER.

Meanwhile, savers investing in the five-year Growth option will receive 4.1 per cent gross/AER. The Income option offers 4.02 per cent gross/4.1 per cent AER.

Savers will need a minimum investment of £500 and can invest a maximum of £1 million in each issue. At the end of the fixed period, savers will have the choice of withdrawing the cash or reinvesting it for a new period.

Laura Suter, director of personal finance at AJ Bell, said these accounts were likely to be very popular because they are backed by NS&I and many savers have a huge loyalty to the organisation’s brand. She noted: “There are around 550,000 existing bond accounts held by NS&I customers, with an average investment of almost £52,000 in each account.”

However, Ms Suter appealed to people to think carefully about their decisions before investing because not everyone may decide to make a given investment.

Remember the tax act?

Ms Suter said: “Savers need to be careful not to get an unwanted tax bill for these accounts. While NS&I Premium Bonds are tax-free, these UK Savings Bonds are not, meaning you could pay tax on the interest you earn if you exceed your personal savings allowance.”

The personal savings allowance gives most people a tax-free limit on the interest they can earn on their savings before it is taxed.

It is currently £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not receive a personal allowance.

Ms Suter said: “Once you exceed your allowance, you will pay tax on the interest at your income tax rate. If you are likely to have a tax bill on the interest, consider whether an ISA would be a better option for your cash savings.”

Ms Suter further noted: “With growth bonds, any interest you receive when you withdraw at the end of the term will be taxed, which could mean you are breaching your personal savings tax-free allowance.

“If that’s the case, you’re better off choosing the Income Bond version, which pays interest monthly. However, you won’t benefit from compounding in that account.”

No early payouts

With some previous versions of these bonds, NS&I allowed people to withdraw their investment early if they sacrificed some of the interest.

Ms Suter said: “This is no longer permitted, which means the money is tied up for the duration of the contract, with no option to withdraw early.”

You can invest up to £1 million

Ms Suter said: “A few years ago NS&I limited the maximum investment to £10,000 for Guaranteed Bonds but extended this to £1 million for British Savings Bonds. The minimum investment of £500 will remain, so if you have savings of less than this amount you cannot use the account.”

How are interest rates doing?

Ms Suter noted that the interest rates on these new bonds were not as “enticing” as those previously offered by NS&I.

She added: “There are a number of providers on the market offering higher rates. The highest two-year fixed rate account on the market pays five per cent, compared to 4.6 per cent offered by NS&I.

“The same goes for the five-year bond, where the market leader pays 4.55 per cent, compared with 4.1 per cent on the British Savings Bond. With the two-year bond, you would be sacrificing £20 a year in interest on £5,000 saved, which some savers might consider a worthwhile sacrifice.

“It’s hard for NS&I to get the interest rate right for these products: if it’s too high it will draw in huge amounts of cash and have to be taken out of accounts, and if it’s too low savers will go elsewhere, meaning NS&I will have to raise the interest rate later.”

Are you interested now or later?

People who choose the “income bond” version will have the interest paid into their bank account each month, meaning they will be able to spend it.

Ms Suter said: “This is a good option if you need an income each month to live on – ideal for retirees, for example. However, if you don’t need the income, choose the ‘Growth’ option, which means the interest is accumulated and added to the bond each year, and you can only access it at the end of the fixed term. Just be mindful of your tax situation.”

NS&I is supported by the government, but do you need it?

One of the advantages of NS&I is that it is backed by the government, so it can be seen as the ‘safest place’ to keep your money.

However, as Ms Suter pointed out: “Other banks and building societies are protected by the Financial Services Compensation Scheme, which covers up to £85,000 per person, per financial institution.

“This means that your money is theoretically as safe in any other FSCS-backed bank as it is with NS&I. But regardless, some people will feel much safer with their savings in the government. In addition, anyone with large savings may prefer to put their money in NS&I rather than dividing it into pots of £85,000 with different providers.”