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National Savings & Investments wields the axe

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At times, National Savings & Investments (NS&I) can seem rather outdated. Its role in raising money for the government has seemed an increasing anachronism for three main reasons:

  • The amount NS&I raise each year is but a small part of the government’s total borrowing. For 2020/21, NS&I’s fundraising target is £35 billon ( £5 billion), however, on current estimates, the government will need to borrow more than ten times as much.
  • Rather than selling NS&I products, the government can raise billions by selling government bonds (gilts) with much less administration at significantly lower interest rates. At the time of writing, gilt yields are negative for terms of up to six years.
  • On the rare occasions when NS&I rates are competitive, it can distort the savings market, prompting criticism from the building societies and banks with which it competes for retail deposits.

Back in mid-February, NS&I announced that it would be cutting interest rates across a range of plans from 1 May. Two months later, once we were in the midst of the health crisis, it changed its mind and announced in a press release under the headline “NS&I supports savers in this unprecedented time”, that it was dropping the planned changes to variable rate products. This left NS&I with a range of league-topping interest rates. Between April and June, nearly £20 billion flowed into its coffers as a result.

On 21 September, announcements were made that rate reductions were necessary to “ensure their interest rates are aligned appropriately against those of competitors”. The recent cuts, which generally take effect from 24 November, were dramatic, as the table below shows.

Product

Current rate

New Rate

Direct Saver

1.00% gross/AER

0.15% gross/AER

Income Bonds

1.15% gross/1.16% AER

0.01% gross/AER

Investment A/C

0.80% gross/AER

0.01% gross/AER

Direct ISA

0.90% gross/AER

0.10% gross/AER

Junior ISA

3.25% gross/AER

1.50% gross/AER

Premium Bonds*

1.40%

24,500:1 monthly odds

1.00%

34,500:1 monthly odds

* From December prize draw.

Such reductions now take NS&I towards the bottom of the league tables. One key aspect that NS&I, however, does retain is full FSCS protection regardless of the amounts deposited.

So how can cash savers hope to bridge the gap? Clearly funds could be moved, in cash, to more competitive banks and building societies, or the answer may be to invest into `real assets` such as equities, shares, fixed interest and property.

But is this a good time to invest? Particularly as we currently seem to hear bad news every day about financial markets. The key factor however is not about when to invest but rather the amount of time you invest for.

Many people believe that knowing when to buy and when to sell is the secret of successful investing. The truth is that no one knows with certainty when investment markets will rise or fall. Trying to time the investment markets is not only stressful, it is very seldom successful. Leaving funds invested, over the medium to long term, usually produces the best returns.

We have produced “Our Guide To Investing” to help you understand, whatever your knowledge and experience, the principles of investing to allow you to make informed decisions. You can download the guide here.

Armstrong Watson Financial Planning & Wealth Management, as well as providing Independent Financial Advice and personalised investment planning also offer a bespoke `cash management` service aimed at maximising interest rates by identifying the most competitive cash accounts, whilst ensuring clients` savings are afforded full FSCS protection.


For more information, please get in touch with Justin by calling 01768 222030 or email justin.rourke@armstrongwatson.co.uk

Contact Justin