NS&I has kept its rates steady
Savers were handed a further piece of bad news when National Savings & Investments cut the rates on its top-paying accounts.
From 12 September, it will pare the rates on its three leading easy access accounts - Direct ISA, Income Bonds and Direct Saver - by up to 0.5 percentage points before tax. It cut the rates paid to its existing savers - rolling over their fixed-rate certificates and index-linked savings certificates - at the beginning of July.
Banks and building societies have been cutting rates dramatically since the government launched its Funding for Lending Scheme in July last year. The scheme is designed to help banks and building societies offer attractive rates to homebuyers and small businesses.
Until now, NS&I has kept its rates steady. But they have become too attractive and are pulling in too much money - NS&I only needs to attract enough new money to cover the amount savers withdraw. It has now announced it does not want to bring in any more money in its current financial year - which runs until next March.
John Prout, retail customer director at NS&I, says: "Historically, the amount of money savers leave with us when bonds mature is high, and currently it's especially high. But the money leaving us is at its usual level of around £12 billion a year; and we are also seeing new customers open accounts with us."
NS&I's Direct ISA falls from a tax-free 2.25% to 1.75%. Direct Saver goes down to 1.1% before tax (0.88% after tax) from 1.5% (1.2%), while its popular income bonds, favoured by savers looking for monthly income, will fall to 1.25% (1%) from 1.75% (1.4%).
Income bonds are its third most popular account after premium bonds and index-linked savings accounts. Savers have £8 billion invested in them.
The cut will reduce monthly income from around £14.50 to just over £10 a month on each £10,000 invested before tax (£8.30 after basic-rate tax).
Savers rolling over their index-linked certificates for a further term will receive inflation plus just 0.05% tax-free, while those with fixed-rate certificates get a lousy 1.6% tax-free for five years, equivalent of 2% before tax for a basic-rate taxpayer and 2.66% for a higher-rate payer.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).