NS&I axes top-rate account – what are the best options now?

National Savings & Investments (NS&I) axed bonds paying 6.2% AER last Friday (6 October), after a quarter of a million people rushed to invest in the accounts. So what does the products' withdrawal mean for savers?

The government-backed provider hiked rates on its Guaranteed Growth Bonds and Guaranteed Income Bonds on 30 August, catapulting them to the top of the rate tables for one-year fixed deals. They remained there unchallenged for five weeks.

Now the products have been pulled from general sale, Which? reveals where else savers can go for a market-leading savings account.

Why were NS&I's rates so high?

NS&I's decision to offer a market-leading rate was likely down to pressure to reach its net financing target of £7.5bn, up from £6bn the previous tax year. 

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.

There were predictions that fierce competition in the market could push the top rate to as high as 6.5% AER – particularly as one-year accounts reach maturity over the next few months and providers possibly look to use savings interest as a way to attract this newly released cash. 

But the Bank of England's decision on 21 September to freeze the base rate at 5.25% may have led providers to hold back from hiking rates higher in anticipation of a calmer economic outlook.

How do rates compare now? 

NS&I's overnight decision to pull its top rate is a cautionary tale for anyone who is waiting around before locking in a new savings deal. 

The table below shows the top restriction-free one-year fixed savings accounts, ordered by rate:

While no provider is currently offering rates as high as NS&I's 6.2% deal, Al Rayan Bank's one-year fix comes very close at 6.12%.

The rest of the best rates table is dominated by challengers offering around 6%, so savers should look way beyond the high street to make more of their money.

But be warned: you need to move quickly if you want the best rate, especially now there are signs that providers are slamming the brakes on savings interest following last month's base-rate decision.

Also, in the time that you're holding out for a better deal, any cash held in a current account is probably earning little to no interest. It will also lose value as it won't be keeping up with inflation, which stood at 6.7% in August.

• 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 6.1% AER on their savings could end up paying income tax on interest earned with £16,394. If you're a higher-rate taxpayer, the tipping point drops to just £8,197.

If you're at risk, consider putting your money in a cash Isa instead.

• Find out more: the personal savings allowance explained