Earlier this week, the Chancellor confirmed details of the much-anticipated NS&I bond in his Budget for 2017. As expected, it'll launch in April this year and is set to pay the market-leading rate for its term, but is it all it's cracked up to be, or could you do better? We take a closer look.
The NS&I Investment Guaranteed Growth Bond will be launched in April and will be available for 12 months, but it should be noted that savers will have to open an account online. It's open to those aged 16 and above, requires a minimum deposit of £100 up to a maximum of £3,000, and won't allow further additions – it requires a lump sum investment that's designed to provide capital growth.
It'll pay a fixed rate of 2.20% that's guaranteed for three years, but unusually for a fixed rate bond, you'll be able to access your cash beforehand should you need to. However, if you do, you'll be charged a penalty equal to 90 days' interest on the amount you cash in, so for maximum benefit, this account should only really be considered by those who can commit to the full three-year term.
There's no denying that the rate of 2.20% is pretty impressive – only Atom Bank in the three-year sector is able to match it, and only five-year deals from the likes of Vanquis Bank, Milestone Savings and BLME can beat it (take a look at our fixed rate Best Buys to see for yourself). The latter accounts require you to lock your money away for two whole years more than NS&I, so on the face of it, the Government-backed provider looks pretty competitive.
However, looking closer at the returns you'll actually get paints a slightly different story. The NS&I bond will only allow you to save a maximum of £3,000, so even if you max it out, you'll only get £66 in interest in the first year.
This is compared with Atom Bank's three-year deal, where you can save up to £100,000 if you're lucky enough to have that kind of cash lying around (if you do, you could earn £2,200 in the first year, but it can only be operated by mobile app and doesn't have the same Government backing as NS&I).
And what if inflation continues to rise, as widely expected? The latest forecast sees inflation hitting 2.4% this year, which will mean savers earning 2.20% in interest will lose money in real terms.
So what are the alternatives? Aside from locking your money away for even longer – which may be an option for those who won't need access to their cash for the foreseeable future – there are a few other options you may want to consider:
· Regular savings accounts. These accounts pay higher rates of interest than traditional savings accounts – up to 3.50%, in fact – on the provision that you pay in cash on a regular (usually monthly) basis. Many will penalise you if you miss payments, and you may not be able to withdraw your cash before the end of a set term, but given the returns on offer, they could well be worth considering. We've just compiled an overview of the top 6 regular savings accounts currently available – check it out to see if there's anything you'd consider.
· High interest current accounts. These may be bank accounts, but they're becoming viable alternatives to savings accounts, often paying far higher rates of interest than the majority of savers on the market. Take a look at our high interest current account Best Buys and you'll see that you can earn interest of up to 5% with Nationwide, while TSB offers a rate of 3% that's supplemented with monthly cashback of up to £10, provided you meet certain conditions. However, many of these accounts come with added restrictions, such as a maximum amount you can earn interest on and monthly funding requirements, so it may take a bit of work (such as transferring money between several accounts) to ensure you get the best returns.
· Stocks & shares ISAs. If you're happy with an element of risk, a stocks & shares ISA could be a great option for those who truly want growth potential. These accounts actively invest your funds in the stock market, rather than keeping it in cash, which offers the chance to secure far higher returns. However, this also means that you could end up with less than you put in, so it's vital to be comfortable with that risk. Read our guide on understanding stocks & shares ISAs for more information.
Ultimately, if you've got a decent savings pot, taking a mix and match approach will probably work best. You may want to start with a high interest current account to get the best possible rate, but if you've got another lump sum that you want to squirrel away, NS&I's bond could well be worthwhile if you're willing to lock your money away for a few years.
After that, you could supplement your savings portfolio with a regular savings account to maximise your returns, and if you're got the right risk appetite, you may want to consider a stocks & shares ISA, too – but only if you've got a long-term view, and only if you can afford to lose your investment should the markets not perform as well as you'd hoped.
So, could you do better than the upcoming NS&I bond? Probably, but if you've got a lump sum, want a simple method of saving and don't want to lose access to your cash for too long, it couldn't hurt to consider it.
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