NS&I launches market-leading 2.2% savings bond
Savers can now take advantage of NS&I’s three-year bond paying 2.2% interest, although critics have described its launch as a “token gesture”.
First announced by Chancellor Philip Hammond last autumn, the NS&I Investment Guaranteed Growth Bond is a three-year savings account paying a rate of 2.2% AER. The product is available from today (11 April 2017).
You can deposit between £100 and £3,000 per person and interest is paid once a year on the anniversary of the account opening. It is available to anyone aged over 16, and joint accounts are also permitted.
However, the account is available online only. Plus, if you withdraw your money before the three years is up, you’ll forfeit 90 days’ worth of interest.
Andrew Hagger of comparison service Moneycomms says the launch will do little to boost the spirits of savers. “The government knew it had to do something to appease savers but this is little more than a token gesture,” he says.
“The chance to earn 2.2% in today’s depressed savings market may look appealing at first glance but it’s not that generous in the scheme of things.
“The bond will no doubt prove popular as savers are desperate to grasp any opportunity in the current low rate climate; particularly as the option of high interest current accounts are no longer really viable since the banks slashed the rates on offer.”
How does the Bond stack up?
The NS&I Bond offers the highest rate in the three-year savings market. But the difference between products is minimal. If you max out your full £3,000 limit when you open the account you’ll earn £66 in interest over the first year. By the end of the three-year term you’ll have made £202.
The next best product on offer is Secure Trust Bank’s three-year fix, which pays 2% until 2020. This would pay you £184 in interest over the same term on the same amount.
If you want to beat NS&I’s product then you’re best looking at current accounts and linked regular savers. The Nationwide FlexDirect account pays 5% interest on balances up to £2,500 for the first year, but this drops to 1% thereafter.
TSB pays 3% interest on its Classic Plus current account, although this is only on balances up to £1,500. You will have to meet certain requirements though to get these accounts. See our current accounts round-up for more information.
First Direct, HSBC, M&S Bank, Nationwide and Santander all offer regular savings accounts paying 5%, but you need to have each bank’s current account to access this top rate. There are also limits to how much you can save in these accounts.
Another way to make the most from cash savings is to play current account ‘ping pong’, see Beat the banks with current account ping pong.
Are there other ways to achieve higher income?
Many Moneywise readers are investing in peer-to-peer lending for higher income. Alternatively, you could consider investing in the stock market, where you can get earn an income of 3% from UK equity income funds. For our recommended funds list, visit the Moneywise First 50 Funds.
Both peer-to-peer lending and stock market investments are higher risk than savings and current accounts. So beware that you could end up losing some or all of your original investment.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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.
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.