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NS&I fails to pass on base rate rise as it boosts savings interest

Rates on selected products to rise in October 2018

National Savings and Investments (NS&I), the government-backed savings provider, will raise interest rates across its range of popular savings products from 1 October – but none of the increases match the 0.25% rise in the Bank of England base rate, which occurred earlier this month. 

Savers holding NS&I’s Income Bonds, Investment Accounts and Direct Savers will all benefit from an increase in rates, but the biggest is 0.15%. Some accounts are seeing an increase of just 0.05%.

Which? looks at how interest rates on NS&I accounts are changing and which products will pay you the best interest rate.

NS&I savings rates from October 2018

NS&I Income Bonds will see the biggest increase to their rates from 1 October, with the gross interest moving from 1% to 1.15% – a 0.15% bump. The overall AER on the account will be 1.16% AER.

You can withdraw money at any time, though the minimum withdrawal is £500, and the account needs to contain at least £500 to stay open. Interest is paid monthly into another account.

The Direct Saver product, which is also instant access and has a minimum deposit of just £1, will increase by 0.05%, from 0.95% AER to 1% AER. You’ll earn interest yearly into the same account, so that it will compound over time.

The Investment Account currently pays 0.7% AER, and will increase to 0.8% AER in October. You can access your money any time, and will earn interest yearly.

But it’s worth noting that this account has no online access. You have to open and manage the account by post, and will need to pay into it with a personal cheque.

You can see the rates payable in the table below.

NS&I product Current interest rate (AER) Interest rate from 1 October (AER) Minimum deposit
Income bonds 1% 1.16% AER (1.15% gross) £500
Direct Saver 0.95% 1% £1
Investment account 0.7%  0.8% £20

All the accounts are variable rate, meaning the interest you earn could change at any time.

How do these accounts compare?

If you’re looking for an instant-access savings account, the highest rate currently offered to all savers is with the Bank of Cyprus UK Online Easy Access account.

Like the Direct Saver, it requires a minimum deposit of just £1 and pays interest annually into the same account. But the rate you can earn is 1.41% AER.

If you’d prefer monthly interest, like with Income Bonds, you could earn 1.35% AER from BM Savings with their Internet Saver Account. You need just £1 to open the account, and the interest will compound, so that your savings will grow faster.

Alternatively, you could earn 1.4% AER from Coventry Building Society’s Limited Access Saver, which also pays interest monthly, with the option to compound interest or pay it out to another account. But you’ll be restricted to three withdrawals a year, after which you’ll be charged 50 days’ interest.

Keep in mind that NS&I rates will kick in on 1 October, whereas the rates we’ve compared are being offered now. It’s possible that rates could change between now and October, and other products may offer a better deal.

To find the right home for your savings, you can use Which? Money Compare to find hundreds of savings and Isa accounts.

Is NS&I right for you?

While the rates paid by NS&I may not be table-topping, there are other advantages you should consider.

Deposits made to the NS&I are fully guaranteed by the government, no matter how large. By contrast, most other savings accounts are covered by the Financial Services Compensation Scheme, which guarantees deposits of up to £85,000 per provider.

Income bonds allow you to deposit up to £1m and Direct Savers up to £2m. So, if you have a large amount to save, and want to keep it with one provider, you may be better off with an NS&I account for peace of mind.

As an alternative to traditional savings accounts, NS&I also offers premium bonds. Rather than pay an interest rate, each month you’ll be entered into a pool for the chance to win a cash prize, with two £1m jackpots up for grabs, alongside millions of smaller-value prizes.

Has the base rate increase been passed on?

At the beginning of August, the Bank of England raised the base rate by 0.25% to a new level of 0.75%.

An increase to the base rate makes it more expensive for banks to borrow money. As a result, they generally increase rates on their loans to consumers, as well as increasing savings rates to encourage more people to make deposits, which in turn they lend out.

In this case, NS&I has not passed on the full base rate increase of 0.25% on any of its savings accounts.

When the base rate increased by 0.25% in November 2017, income bonds, investment accounts and direct savers all benefited from the full 0.25% increase.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of a provider before committing to any financial products.

Categories: Money, Savings & Isas

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