Today, National Savings & Investments (NS&I) announced that it was planning to reduce rates on its variable rate savings products, premium bonds, as well as some fixed term saving accounts, which are due to come into effect on 24 November. Both NS&I’s variable rate saving products and premium bonds have proved popular this year, especially as they offered highly competitive rates at a time when many providers were reducing or withdrawing competitive savings rates. But as NS&I is set to reduce rates at a time when providers are starting to increase saving rates, we take a look at how competitive the reduced NS&I rates will be and whether premium bonds are still a good investment.
On 24 November, NS&I is set to reduce the rates on its Direct Saver, Investment Account, Income Bonds, Direct ISA, and Junior ISA. The current rates and new rates are:
|Product||Current interest rate||Interest rate from 24 November 2020 (change in brackets)|
|Direct Saver||1.00% gross/AER||0.15% gross/AER (-85 basis points)|
|Investment Account||0.80% gross/AER||0.01% gross/AER (-79 basis points)|
|Income Bonds||1.15% gross/1.16% AER||0.01% gross/0.01% AER (-114/115 basis points)|
|Direct ISA||0.90% gross/AER||0.10% gross/AER (-80 basis points)|
|Junior ISA||3.25% gross/AER||1.50% gross/AER (-175 basis points)|
Commenting on the plan to reduce rates, Ian Ackerley, chief executive at NS&I, said: “Reducing interest rates is always a difficult decision. In April we cancelled interest rate reductions announced in February and scheduled for 1 May. Given successive reductions in the Bank of England base rate in March, and subsequent reductions in interest rates by other providers, several of our products have become ‘best buy’ and we have experienced extremely high demand as a consequence. It is important that we strike a balance between the interests of savers, taxpayers and the broader financial services sector; and it is time for NS&I to return to a more normal competitive position for our products.”
In the easy access savings chart, NS&I has held the top spot for many weeks with its Income Bonds paying 1.15% gross monthly. As well as this, its Direct Saver also offered a highly competitive easy access savings rate of 1.00% gross yearly. Meanwhile, its Investment Account sat slightly lower down the chart, with a rate of 0.80% gross yearly. Once the rates are reduced in November, all NS&I easy access accounts will sit towards the bottom of the chart.
At the moment, NS&I’s Direct ISA offers a highly competitive rate of 0.90% gross yearly in the easy access ISA chart. However, again, once the rate is reduced, this ISA will sit towards the bottom of the chart.
NS&I is currently topping the Junior ISA (JISA) chart with its Junior ISA paying 3.25% gross yearly. Once again, when its rate drops to 1.50% in November, it will offer one of the lowest rates in the chart.
Along with reducing rates on its saving accounts, NS&I is set to reduce the rate on its premium bond prize draw. The reduced rate will see the odds of winning fall from its current rate of 24,500 to 1, to 34,500 to 1 from the December draw onwards as the number of those winning prizes is reduced. The current and new prize draw rates are:
|Current prize fund rate||Current odds||New prize fund rate (from December 2020)||New odds (from December 2020)|
|1.40% tax-free||24,500 to 1||1.00% tax free||34,500 to 1|
Although this rate reduction will still see two people win the top prize of £1 million each prize draw, the number of winners of lower prizes will be reduced. For example, the number of winners of the £100,000 prize will fall from seven to four, and the winners of the £50,000 prize will fall from 14 to nine.
During 2020, many savers opted to put their money into premium bonds as they allowed quick access to funds, as well as a tax-free savings option on any winnings. As well as this, with saving rates so low, through the chance of winning prizes, premium bonds offered savers the opportunity to potentially earn a greater return on their investment than standard savings accounts.
If savings rates remain as they are or start to fall again, premium bonds offering a rate of 1.00% are likely to remain popular with savers prepared to risk earning no returns on their deposits for the chance of winning higher than standard savings returns.
While premium bonds have the advantage of being both tax-free and backed by HM Treasury, those looking to make a long-term investment and prepared to risk not making a return on their deposits could also consider a structured deposit instead.
Structured deposits have the security of guaranteeing that the initial capital invested is returned to the investor but do not guarantee the investor will earn a return. This is because money invested in a structured deposit is invested in relative to the stock market and, as such, returns will depend on how the stock market index performs. This means that if the stock market performs well, those who have invested in a structured deposit could earn a better return than investing in premium bonds. For more information about investing in structured deposits, visit our structured deposits page.
Another, but risker option, is investing in stocks and shares ISAs. Stocks and shares ISAs are riskier because investors not only risk not earning a return on their investment, but may also lose all the capital they initially invest. However, investing in stocks and shares ISAs could also result in earning higher returns than both premium bonds and structured deposits, as well as currently offering a tax-free limit of £20,000 per tax year. Normally, those looking to invest in stocks and shares ISAs should do so only as a long-term investment, usually for a minimum of five years, and they should be fully aware of the risks involved in this type of investment before committing their money. More information about stock and shares ISAs can be found on our stocks and shares ISA page.
Savers considering making investments should be aware that investment scams and frauds remain high and due diligence should always be carried out before depositing money into a savings account or as an investment. For more information about some of the most common finance scams read our story Finance scams on the rise since Coronavirus pandemic .
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