NS&I doubles ISA rate
National Savings & Investments (NS&I) has unveiled its first rate hike in two years, which sees the interest on its cash ISA effectively double.
The government-backed savings provider this week announced it is upping the rate of return on its Direct ISA by 1.2% to 2.5% AER. It has also increased rates on its fixed-interest savings certificates and children's bonus bonds by 1.20%.
NS&I says the rate change reflects the changing face of the banking and savings section: “[NS&I] continues to follow a pricing strategy designed to balance the interests of its savers, the taxpayer and the stability of the financial services market.”
The collapse of Icelandic bank Icesave and the subsequent mass panic over the safety of British banks at the end of last year saw NS&I benefit from a huge influx of deposits. Although no saver in the UK has yet to lose money as a result of a bank collapsing, savers were attracted by the government’s 100% protection guarantee at NS&I.
However, the so-called ‘flight to safety’ is no longer as much of a concern for savers and interest rates have started to improve – prompting savers to ditch NS&I and find better homes for their money.
The provider has never promised to offer best-buy deals, but the rate rise reflects its need to be more competitive in the current market. In order to offset the cost of interest payments and prizes it must attract £14 billion of savers’ money for 2009/10. The first three months of the current year saw it achieve inflows of £3.2 billion.
Savings experts say the provider may increase rates again. Malcolm Cuthbert, chairman of Killik Chartered Financial Planners, says: “The government needs our cash badly so it wouldn't be surprising if we didn't see more increases in rates from NS&I in the future.”
How does the NS&I ISA compare?
The NS&I Direct ISA now pays a variable rate of 2.5% AER on deposits of at least £100. This account is open to anyone over the age of 16 and can be managed by telephone or online.
You can make further deposits into this account via a standing order, electronic transfer or by debit card, but these must be of at least £50 and, of course, you can only save up to £3,600 each tax year in a cash ISA.
Unlimited withdrawals are also permitted as long as these are of at least £50.
While the rate on the NS&I ISA has effectively doubled, it is still far from being the most competitive account on the market. However, the low initial deposit required and unlimited withdrawals do make it stand out.
Manchester Building Society pays 3.26% AER on its Premier ISA, which includes a bonus rate of 0.8% for 12 months. You will need at least £1,000 to deposit to qualify, however, and you'll also have to give 45 days' notice to make withdrawals.
Newcastle Building Society, meanwhile, pays 3% AER including a 1% bonus rate for 12 months. Again, you'll need to give notice to make a withdrawal - on this account, the notice period is 120 days.
Buckinghamshire Building Society pays 2.84% AER on its Monthly Income Cash ISA. You'll only need £100 to open this account but the withdrawal notice period is 180 days.
You can get a better rate on your ISA savings if you are prepared to lock the money away for several years, without any access for further deposits or withdrawals.
The best fixed-rate ISA is from Leeds Building Society. You'll earn 4.6% AER but your money will be tied up for five years. The initial deposit is only £1 but further deposits and withdrawals are not permitted.
For more of the best fixed-rate cash ISAs read our daily pick of the top ISAs
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.