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Your Money > Savings Articles > National Savings - safe but not sexy
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By Sarah Modlock
We are - mercifully - spared from dozens of financial adverts on TV. We are not likely to see that many in coming months either as firms tighten belts and review their budgets. All of which makes the latest National Savings & Investments (re-branded NS&I) adverts stand out even more. Plus they also feature the eye-catching combo of Bob Geldof, Germaine Greer, Stephen Hawking and Sir Alan Sugar. How many safe pairs of hands do we need to see? NS&I are clearly saying to viewers (and savers) 'You can trust us in these turbulent times'. And it seems to be working because more than £2billion has been poured into NS&I products since the problems with Northern Rock last year. Because deposits at any one institution are protected up to £35,000 under the deposit protection scheme, savers with more than that wanted a safer home. Of course now that Darling & Co have nationalised the bank, its products are the only ones - apart from NS&I's - with 100% guarantees. So what is all the fuss about and can NS&I products deliver decent returns alongside their secure status? What is NS&I? Established in 1861, NS&I is one of the UK's largest financial providers with over 27 million customers and over £83 billion invested. It is best known for Premium Bonds but also offers Savings Certificates, Direct ISA, Guaranteed Equity Bonds and Children's Bonus Bonds in its range. All products offer 100% security, as they are backed by HM Treasury but for many the real appeal lies in their tax free savings. Products are available through 13,500 Post Office branches, via post, telephone and online. Brochures are also available in 400 WHSmith stores across the UK. What does it offer? More than just savings accounts and Premium Bonds, the range of products available includes ISAs, bonds and investments. Fixed Interest Savings Certificates are lump sum investments that earn guaranteed rates of interest over set terms. They're free of Income Tax and Capital Gains Tax and they appeal to investors who want to know exactly how much interest their money will earn. Investors will need a minimum of £100 and can stash £15,000 per issue. Current rates are 2.9% for the two-year (42nd) issue and 2.95% for the five-year (91st issue). But it is not hard to find much better elsewhere. Fixed rate bonds from First Save and Heritable Bank top independent Moneyfacts listings with rates of 7.1% and 6.8% respectively. Even Northern Rock's Bonds offer more than NS&I - 5.08% net for the one, two and three year options. With Index Linked Savings Certificates the value of your investment increases in line with inflation as measured by the Retail Prices Index (RPI) and earns guaranteed interest rates on top, with returns tax-free. Because inflation fluctuates, you won't know exactly how much you are going to receive until your Certificates mature and so these may appeal to those who are not after a specific sum but want to know that their savings will always beat inflation. Taking April's 4.0% RPI increase plus the 0.70% currently paid on both Certificates, and bearing in mind that your returns will be bumped up because they are tax free, this is still rather disappointing given that the rates just a few months ago were closer to 5.5%. As it is, there are plenty of savings accounts around which can rival the 7% on offer here at the moment. It is worth keeping an eye on these as higher rates could make them attractive. One thing to bear in mind is that although you can cash these Certificates in at any time, you really need to hang onto them for the full term - a minimum of three years - to get the full benefit. If you cash in your investment in the first year you won't get any interest at all. Guaranteed Growth Bonds and Guaranteed Income Bonds give you the choice of tying up your money for one, three or five years. With the income bond, you can expect to get something back each month so is ideal for someone wanting to tuck cash away and receive an income boost while keeping your capital safe. The growth bond reinvests the returns and pays them back to you at the end of the term. This may appeal to someone planning for a specific event or cost. The annual rate on the one-year Guaranteed Growth Bond is just 3.2% after 20% savings tax (4% before tax). With the annual cost of living rising at 4.1%, savers will not earn enough to beat inflation. On each £1,000 invested, you will see interest of just £32.00 for the year after savings tax. The rate is currently the same for the three year Bond. If you fix for five years it is slightly better - 4.05% gross (3.24% for basic tax payers). The Guaranteed Income Bonds also run for one, three or five years but pay out interest each month. If you go for a one-year term, the rate is 3.90% gross or 3.12% for lower rate tax payers giving monthly income of around £26 for each £10,000 invested. If you opt for the five-year version, the rate is 3.95%. At the moment, it is not hard to find better rates of interest on ordinary savings accounts, even in the high street. Although it does not have the same sort of products, it is worth having a look at what Northern Rock has to offer and compare rates with NS&I and elsewhere (taking into account the amount you are investing and the level of protection offered). Northern Rock's e-saver account pays 4.80% net and it's one and three-year ISAs pay fixed rates of 6.0%. One brilliant product unique to NS&I however is the Premium Bond. By far the most popular product in the range, Premium Bonds account for 40% of everything invested in NS&I. Each bond costs £1 and gives you one chance to win up to £1million in tax-free prizes every draw. Your bonds are identified by a series of numbers and letters which will appear on your holder's certificate. Bonds are issued consecutively so a single investment will buy a block of numbers. But big-win potential aside, much of the huge popularity of Premium Bonds is down to the fact that the capital you 'invest' is completely safe and you never get back less than you put in so they are ideal for risk-averse savers who are prepared to give up interest for the chance of a big win - or several small ones. With an average return of 3.8%, NS&I states a person with average luck and a maximum investment of £30,000 can expect to win 15 prizes a year (ranging from £50 up to a cool £1 million). There are no charges and all or part of your holding (from £100 to £30,000) can be cashed in at any time by completing a repayment form and sending it to NS&I. Payment is then issued within eight working days from receipt of the repayment form. Useful links: |
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