What The NS&I Interest Rate Cut Means For Savers

This week, National Savings & Investments (NS&I) announced dramatic cuts to the interest rates it pays on a number of its savings accounts, as well as reductions to the prizes it pays out for Premium Bonds. The changes take effect from 24 November, giving savers just two months to move their money to ensure they maximise interest on their deposits.

Below, we take a look at the NS&I changes in detail as well as the options available to savers to ensure they get the best return on their cash.

 

What are the changes to savings accounts?

The drastic changes range from 54% up to 99%, depending on the product:

NS&I Product

Existing Rate

New Rate

% Drop

Income Bond

1.16%

0.01%

99%

Direct ISA

0.90%

0.10%

89%

Direct Saver

1.00%

0.15%

85%

Investment Account

0.80%

0.01%

99%

Junior ISA

3.25%

1.50%

54%

Guaranteed Growth Bonds (One year)

1.06%

0.06%

94%

NS&I had planned to cut their rates from May 2020 but cancelled that reduction in April to support savers during the Coronavirus pandemic. The upcoming cuts go much further however than the reductions planned for earlier this year.

 

What about Premium Bonds?

Currently, the prize rate for Premium Bonds is 1.4%. This means that for each £1 bond, you have a 1 in 24,500 chance of winning any prize.

From the December 2020 draw, these odds will drop to 1 in 34,500. The result? Over a million less prizes being given in December vs prior months.

Along with their variable rates, NS&I has planned to make these changes earlier in the year but were also put on hold. The changes now therefore come as less of a surprise as many speculated that they would come sooner rather than later.

 

Why have NS&I made these changes?

NS&I have said “"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.”

When consumers save with NS&I, they’re lending money to the Government. With the ongoing pandemic, the Government has effectively used NS&I as a method of bringing cash in, which they could then use to apply elsewhere such as HM Government’s Job Retention Scheme. However, despite being a quick way of bringing in cash it’s more expensive than other means, and therefore it’s not sustainable in the long term.

The Government-back rated change coincides with stock market volatility, the end of the furlough period for many and a rising number of regional lockdowns. Plus, the pending new national restrictions for living and working will impact a high number of individual income streams.

 

What can I do now to maximise interest on my savings?

Whilst depositing with your High Street bank might seem like the easiest option, most of the major players, including the big five, pay just 0.01% on instant access accounts - the same rate NS&I are reducing their previously market-leading Income Bond to. Whilst Instant Access savings accounts offer flexibility when it comes to accessing your cash, you usually pay for the benefit with lower rates. Instant access accounts also generally have variable interest rates, meaning that the amount of interest you earn will vary as rates change.

Fixed-term accounts usually give you better rates than instant access accounts, so are ideal if you want to maximise interest and don’t need quick access to your cash. These accounts also generally offer a fixed rate for the term, meaning you’ll know much interest you’ll earn over the period without having the doubt that rates might be cut as is the case with variable rate accounts. The longer the term generally means a higher rate, although not in all cases so make sure you check the individual terms of each account.

You may therefore find it beneficial to have a composition of accounts suitable to your individual needs. Many savers will spread their cash across a combination of instant access, notice and fixed term giving themselves maximum flexibility.

 

What should I do if I have Premium Bonds?

Premium Bonds are effectively a savings account you can put money into, however instead of being paid interest, tax-free prizes are awarded in a monthly prize draw – meaning there's no guarantee you'll get any return on your money. Many Bond Holders think of them similar to playing the lottery; excitement on draw day and the opportunity to win big.

As we discussed above, the prize rate is changing from 1.4% to 1% from the December 2020 draw. Although it's a benchmark of the average return you'll get for your money, there's no guarantee you'll win anything at all. Though Premium Bondholders will find the rate cut disappointing, most savers will feel that they're not worth it even before the reduction. If you have average luck and – like most savers - don't pay tax on savings interest, putting your cash into savings will make most sense.

 

How do I ensure my money is protected?

All UK-regulated bank and savings accounts in banks, building societies and credit unions are covered by the Financial Services Compensation Scheme (FSCS). This FSCS Protection covers up to £85,000 per person, per financial institution. This means joint account holders get £170,000 protection per financial institution. So, in the absolute worst case that the bank fails, you'd get back up to £85,000 per person, per financial institution.

To ensure maximum protection, you may therefore choose to spread your deposits across multiple banks or financial institutions to maximise your FSCS protection – remembering that £85,000 (or £170,000 for joint accounts) is covered in each.

Although opening multiple deposit accounts is a hassle, this is where Flagstone can help.

 

How can Flagstone help?
Flagstone savers can currently receive up to 1.60%* on their savings across the platform’s extensive portfolio of over 40 banks and more than 250 accounts – all accessible through one easy online interface.

A single Flagstone account would provide you with the flexibility to move your money between accounts, whichever savings products work best for your needs – be that maximising interest, ensuring your savings are FSCS protected or a combination of both. Your Flagstone portfolio will allow you to see all your savings together in one place, meaning you not only earn more, but with complete peace of mind.

You can open an account as an individual, or as a joint account, business or charity. Rates will differ depending on your circumstances.

 

How do I open a Flagstone account?

Complete our online enquiry form to speak with one of the team, and they can create a personalised illustration showing how much further your savings can go for you. Speak to us today and learn how the Flagstone cash platform can help you achieve your savings goals.

A minimum deposit of £250,000 is required to open a Flagstone account.

 

 * The annual equivalent rate (AER) shown in gross before fees, correct as of 22nd September 2020. Rate is available to individual or joint applicants only. Rates for companies and charities will differ.

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