What could your NS&I certificate be worth and should you renew it?
More than a 300,000 savers, many of whom are pensioners, could miss out on hundreds of pounds of interest if they don't switch away from a tax-free inflation-linked account from National Savings and Investments (NS&I).
The Index-Linked Savings Certificates promise to always beat the current rate of inflation – as measured by the Consumer Price Index (CPI) – and although they're no longer on sale, customers can still renew them for two, three or five years.
Soaring inflation over the past couple of years meant holders of so-called granny bonds that reinvested their cash in July 2022 received an initial savings rate of more than 9%, compared with no deals that could beat inflation in the rest of the market.
But with the CPI figure now at 2% and the majority of traditional savings accounts offering double that rate, NS&I certificate holders whose accounts are maturing now might want to consider moving their money elsewhere. Which? takes a closer look at what Index-Linked Savings Certificates offer.
What are Index-Linked Savings Certificates?
Index-Linked Savings Certificates were launched by NS&I in 1975 and were initially only available to pensioners. Although a rule change in 1981 allowed anyone to invest in them, they're still often referred to as granny bonds.
The product works in a similar way to standard fixed accounts, with savers locking their money away for the entire term of the bond. What makes them different, however, is their promise to always offer interest that beats the rate of inflation.
Returns are currently set at the CPI figure, plus 0.01%. Before 1 May 2019, NS&I used the Retail Price Index (RPI) measure of inflation. Earnings, which are tax-free, are added on each purchase anniversary, rather than monthly or at the end of the investment term.
- Find out more: what is National Savings and Investments?
How much could your certificate be worth now?
Certificates stopped being sold in 2011, but the latest NS&I data shows that they're still popular with many savers, the average age of whom is 69.
As of 31 March 2023, there were 330,000 certificates in existence, holding a huge cumulative total of £20bn. But the actual return you receive will depend on the level of CPI inflation at the start and end of each investment year.
We've used NS&I's Index-Linked Savings Certificate calculator to reveal how much interest a person would have earned if they renewed their bond – with an average holding of £14,320 – two, three or five years ago. It also shows what rate you'd need on a standard fixed bond to earn the equivalent amount of interest over the same time period.
| Term of NS&I savings certificate | Total interest earned if bond matures on 10 July 2024 | Equivalent interest rate (AER) |
|---|---|---|
| Two years | £1,533 | 5.3% |
| Three years | £3,010 | 7% |
| Five years | £3,494 | 4.7% |
Source: NS&I.
As you can see, certificate holders that renewed their bonds three years ago have reaped the biggest rewards from rocketing interest rates. The CPI figure would have been 2.5% on 10 July 2021, but that had soared to 9.4% on the investment anniversary the following year and was still very high at 7.9% on the same day in 2023.
Whether your maturing certificate was renewed two years ago or five, the interest earned over that period is far more than if you'd invested in a traditional savings account. The average rate for a fixed-term bond lasting more than one year on 1 July 2019 was just 1.78% AER. One year later, it had fallen to an abysmal 0.92% before rising to 2.21% on 1 July 2022.
Should you renew now or switch?
Customers who have held on to their Index-Linked Savings Certificates have certainly seen their patience pay off over the past few years. While their nest eggs have grown, others have been forced to watch inflation slowly erode the value of their savings pots over time.
But now that the CPI figure has fallen to the Bank of England target of 2%, the decision to renew isn't so clear cut.
Savers looking for an inflation-busting deal are now spoilt for choice, with the latest Moneyfacts data showing 1,622 products offer rates higher than 2%. That includes easy-access, notice accounts, variable-rate deals, fixed-rate bonds and Isas.
A rule change last July also means that NS&I certificate holders can no longer access their cash during the term. Locking your money away for at least another two years at a below-average rate of 2.01% isn't the most attractive proposition when you could be getting far larger returns elsewhere.
To get a better idea of what the rest of the market is offering, take a look at our table below. It shows the top rates for fixed-term and instant-access cash Isas, and savings accounts, ordered by term.
| Account type | Account | AER | Terms |
|---|---|---|---|
| Five-year fixed-term savings account | United Trust Bank 5-Year Fixed Term Deposit | 4.6% | £2,000 minimum deposit |
| Five-year fixed-term cash Isa | Principality Building Society 5-Year Fixed Rate Cash Isa | 4.25% | £500 minimum deposit |
| Four-year fixed-term savings account | United Trust Bank 4-Year Bond | 4.35% | £5,000 minimum deposit |
| Four-year fixed-term cash Isa | United Trust Bank Cash Isa 4 Year Bond | 4.1% | £5,000 minimum deposit |
| Three-year fixed-term savings account | Hodge Bank 3 Year Fixed Rate Bond | 4.81% | £1,000 minimum deposit |
| Three-year fixed-term cash Isa | Principality Building Society 3-Year Fixed Rate Cash Isa | 4.6% | £500 minimum deposit |
| Two-year fixed-term savings account | Close Brothers Savings 2-Year Fixed Rate Bond | 5.06% | £10,000 minimum deposit |
Source: Moneyfacts. Correct as of 10 July 2024, but rates are subject to change.
If we look back to June 2023, when the CPI measure stood at 8.7%, there were no deals that could beat inflation. Now all the top interest deals listed in our table are more than double the current rate at which prices are increasing.
The best deals currently on the market are offered by smaller, challenger banks, with the highest rates on short-term fixed bonds or instant-access accounts.
- Find out more: how to find the best savings account.
Watch out for the savings tax trap
One of the biggest benefits of NS&I's savings certificates is that any interest earned is tax-free and comes on top of your £20,000 annual cash Isa allowance or any premium bond wins.
However, record high rates on other types of account over the past two years mean that a rising number of savers, even with those with modest pots, are now liable to pay tax on the interest they earn. New HMRC data estimates savers will collectively pay more than £10bn in tax on interest this financial year, up nearly ten-fold from the £1.4bn they paid in 2021-22.
Thankfully, there are a few other legitimate ways to reduce how much of a cut HMRC will take from your savings returns. Take a look at our top tips on how to keep more of the money earned on your nest egg.
- Find out more: tax on savings interest and investment income.
