National Savings cuts rates

By DAVID BURROWS
Updated:

 

NATIONAL Savings & Investments has reduced the interest paid on the majority of its fixed-rate savings products, and may pay the price as customer chase better rates elsewhere.

NS&I insists that the rate reduction was unavoidable following significant falls in gilt yields over the past three months.

In its defence, National Savings argued that since 21 April, it has held its rates, despite a fall in gilt yields. However, as the trend in gilts continued downwards, rate reductions became inevitable.

National Savings variable rate products such as the Investment Account and the Easy Access Savings Account remain unchanged. NS&I is not alone when it comes to chopping rates, many other leading savings account providers have also reduced rates over the past three months, including NatWest, HSBC, ING Direct, Alliance & Leicester, Lloyds TSB, and Birmingham Midshires.

Among the NS&I changes - rates on Pensioners Guaranteed Income Bonds come down by up to 0.55% to 3.7% (3.75% on 5-year bonds), Children's Bonus Bonds fall by 0.45% to 3.65% and while the rate on 3-year Index Linked Savings Certificates remains unchanged, the 5-year (38th issue) is shaved by 0.05%. On the 3-year fixed rate savings bond, the interest rate has dropped 0.5%. So for savers investing £50,000-plus the new rate is 3.9%; for £20,000 plus it is 3.7% and for those with deposits of £500 or more the rate is 3.55%.

Peter Cornish, head of customer offer at National Savings insisted the downward trend on rates had been a forced issue but that going forward there was no reason that rates could not be raised again if the circumstances were right. 'We always price our offers fairly and consistently in line with movements in the market and, if gilt yields rise again, we would aim to increase our fixed rates,' he said.

But Colin Jackson, director of Essex-based IFA Baronworth Investment Services, believes National Savings are uncompetitive and was not a fan even before the latest cuts. 'My client base is fundamentally made up of investors close to or in retirement, so National Savings should in theory be a safe haven for their money but the rates just aren’t competitive. Certainly anyone with £5,000 or more to invest should consider a guaranteed income bond. For comparison purposes, if you had £40,000 to invest, in an AIG Guaranteed Income Bond you would get a gross equivalent of 4.64% compared to 3.70% on a National Savings Pensioners Guaranteed income bond.'

Jackson adds: 'Other guaranteed income products knock National Savings into a cocked hat. The only conceivable advantages they have is the fact that National Savings have an entry limit of £500 as opposed to £5,000 for other providers' products. And you could argue that because they pay gross, they are better for non-taxpayers, but you should still look around for better rates and see how things add up.'

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