Could NS&I spark a rates war on one-year fixed savings?
National Savings and Investment (NS&I) is usually known for humdrum savings rates, so it caused a stir last week when it boosted its range of one-year bonds to a market-leading position.
The new issues of its one-year Guaranteed Growth Bonds (previously 5%) and Guaranteed Income Bonds (previously 5.12%) both increased to 6.2% AER – the highest rate since these products first went on sale in 2008.
Here, Which? takes a look at what's behind the change and what it could mean for one-year savings rates.
Why are NS&I's new top rates so surprising?
The fact that NS&I is now leading the pack with its one-year fixed rates is a real turn-up for the books.
That's because NS&I is backed by the Treasury and 100% of deposits are protected. In contrast, other savings accounts are normally covered by the Financial Services Compensation Scheme (FSCS), which protects savings up to a limit of £85,000 per individual, per financial institution.
Traditionally, NS&I has trodden a fine line between offering competitive enough rates to attract investment from savers – but nothing so dramatic it could impact the taxpayer or distort the savings market.
- Find out more: the FSCS: explained: are my savings safe?
What's behind NS&I's bold rate change?
One factor in NS&I's decision to offer a market-leading rate could be to reach its net financing target of £7.5bn, up from £6bn the previous tax year.
With the cost of living still squeezing many household budgets, Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, says NS&I could be throwing its weight behind a market-leading rate to attract whatever cash is still around.
'There’s a chance it will hope this account can do much of the heavy lifting,' says Coles.
'The advantage for NS&I is that cash in a fixed-rate account is "sticky" [ie long-term]. We’ve seen people dipping into easy-access cash across the market in recent months, so this product will lock the cash in. The organisation doesn’t risk a tide of money flowing in and then flooding back out again when the rate drops.'
'However, there are no guarantees. It might feel that it doesn’t want to attract too much cash at what might end up as the peak of the one-year fixed rate market.'
- Find out more: what is National Savings & Investments?
Could NS&I spark a rates war?
NS&I is beating fierce competition from challenger banks and remains at the top spot for one-year fixed-rate deals one week after its rate hike was announced. It also beats the top rate on two, three, four and five-year deals.
The table below shows the top restriction-free one-year fixed savings accounts, ordered by rate:
| One-year fixed savings account | AER/EPR | Terms |
|---|---|---|
| NS&I, Guaranteed Growth Bonds and Guaranteed Income Bonds | 6.2% | £500 minimum opening deposit |
| Habib Bank Zurich plc, HBZ Fixed-Rate eDeposit | 6.03% | £5,000 minimum opening deposit |
| SmartSave One-Year Fixed-Rate Saver | 6.01% | £10,000 minimum opening deposit |
| Bank of London and The Middle East, Premier Deposit Account* | 6% | £1,000 minimum opening deposit |
Source: Moneyfacts. Correct as of 5 September 2023, but rates are subject to change. *The account from Bank of London and The Middle East is a Sharia-compliant product, and so offers an expected profit rate (EPR) as opposed to an annual equivalent rate (AER).
So providers haven't rushed to beat NS&I – yet.
The next best one-year deal pays 0.17 of a percentage point less than NS&I so it would take a big leap from other providers to be competitive. However, Coles predicts the top rate could hit as high as 6.5% AER.
If the Bank of England decides to hike the base rate again when it meets on 21 September, that could help push interest on savings higher.
It's also been almost a year since rates began to climb following the government's controversial mini-budget in September and customers began fixing their savings.
As one-year accounts reach maturity over the next few months, providers that want to attract this newly released cash may use competitive savings rates as a way to stand out.
- Find out more: the best savings accounts
What to consider before fixing your savings
Think carefully before you rush to take advantage of the record rates offered by shorter-term fixed bonds.
You may find better returns in the long run with a two, three, four or five-year account. That's because if you want to reinvest your savings once the one-year bond matures in 12 months' time, savings rates could be significantly lower than now.
Also, remember that higher interest rates could land you with a tax bill.
The personal savings allowance means basic-rate taxpayers can earn up to £1,000 a year in savings interest tax-free, while higher-rate taxpayers get a £500 limit. Additional-rate taxpayers have no personal savings allowance.
In a climate of low savings rates, these allowances have been more than enough for most savers not to worry about exceeding them – but, the higher rates rise, the easier it is to end up with a tax bill.
Basic-rate taxpayers earning 6.2% AER on their savings could end up paying income tax on interest earned with £16,130. If you're a higher-rate taxpayer, the tipping point drops to just £8,065.
- Find out more: the personal savings allowance explained
