personal finance

NS&I puts pressure on banks with market-leading 6.2% bond

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National Savings & Investments has raised the interest rate on its one-year fixed bonds from 5 per cent to 6.2 per cent, putting it in a lead position in a key segment of the savings market and raising pressure on banks to follow suit.

Wednesday’s move, the latest in a dramatic series of increases from the state provider, highlights the government’s determination to push banks into passing on the recent surge in interest rates to savers as well as borrowers.

“It’s vital that savers are able to benefit from recent interest rate rises,” said Andrew Griffith, the UK’s economic secretary to the Treasury, adding that NS&I’s one-year rates (on its Guaranteed Growth and Guaranteed Income Bonds) were now at their highest level since they were launched in 2008.

NS&I is lifting rates faster than its commercial rivals at a time when MPs, ministers and regulators have insisted banks increase savings rates to more competitive levels. In July, the UK’s Financial Conduct Authority met providers after it raised concerns that saving rates were lagging behind increases in the cost of mortgages.

NS&I’s moves mark a switch from its long-held policy of avoiding competing aggressively to prevent distortions in the UK savings market. Unlike mainstream lenders, it benefits from state backing and can guarantee entire deposits rather than £85,000 cover available elsewhere.

The previous leading one-year fixed product offered savers 6 per cent, according to data provider Moneyfacts.

NS&I has also announced an increase in the rate offered on bonds issued for periods between two and five years for existing customers with maturing products, up to a range between 5.37 per cent and 5.8 per cent. Last week, it improved the rate offered on its Green Savings Bond to 5.7 per cent.

“This is becoming a far more competitive environment, in part due to fierce lobbying by the government,” said Giovanni Daprà, co-founder of online investment platform Moneyfarm. “Higher rates are fair and also needed to keep attracting and retaining retail cash deposits.”

The state-backed provider was tasked with raising £7.5bn in net financing for the government this year, up from £6.1bn in the previous year. It previously exceeded targets, raising some £10bn in 2022-23.

With the central bank rate hovering around 5.25 per cent and above-target inflation placing pressures on household finances, NS&I faces a more challenging environment in which to raise funds this year. Households withdrew a net £200mn from NS&I in July, following net inflows of £2.1bn in the first quarter of the year, according to Bank of England data.

Analysts have also pointed out that despite NS&I’s rate increases those with larger savings were still better off investing in gilts.

“While the headline rate of interest is appealing, the net rate for higher and additional rate taxpayers will be far less,” said Rachel Winter, a partner at wealth manager Killik and Co. The £1,000 personal savings income allowance is also easily breached in the current high-rate environment.

Winter added that individuals would receive a greater net return by investing in short-dated gilts with a low coupon and a large discount to maturity price, as capital gains tax is not levied on any uplift at maturity.

However, access to the gilt market remains tough to enter for those without advice or professional experience.


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