18/04/17National Savings & Investments launch ‘market leading’ account

National Savings & Investments (NS&I) has launched its new Investment Guaranteed Growth Bond, after announcing it in November 2016.

The fixed rate bond offers the highest interest rate currently available at 2.2% gross/AER, and has been called ‘market leading’ by the Treasury. Despite the competitive interest rate, it doesn’t beat the current rate of inflation, as measured by the Consumer Prices Index (CPI), which is currently at 2.3%.

What are the key features?

Although the account is called an Investment Guaranteed Growth Bond, it isn’t actually an investment product. Instead, it works as a savings bond, with no element of capital risk.

A fixed return of 2.2% is offered, which would see a £1,000 deposit turn into £1,067.46 over three years. Other key features include:

  • £3,000 is the maximum can be saved
  • A three-year term
  • The 2.2% interest rate is fixed and won’t change
  • The account is only available online
  • A minimum deposit of £100 is required to open the account
  • Early access is possible, but will incur a penalty equal to 90 days of interest
  • Returns are potentially taxable, dependant on personal circumstances

What are the advantages and disadvantages? 

Unfortunately, the interest rate doesn’t beat the current rate of inflation. Nevertheless, the NS&I bond pays a very competitive rate of interest, if you are happy to put it aside for three years. Early access is possible, but a penalty equal to 90 days will be incurred, and £100 must be left in the account to keep it active.

The online-only nature of the account may benefit people who are more comfortable dealing with their finances via the internet. This comes with its disadvantages, of course, as it excludes anybody who has no internet access, or prefers to bank by visiting a branch or by phone.

The returns are potentially subject to tax, which will come out of your Personal Savings Allowance. This currently stands at:

  • £1,000 for basic-rate taxpayers
  • £500 for higher-rate taxpayers

Any savings income above this threshold will be taxed. This should only affect people with additional methods of saving, as the returns on the maximum of £3,000 would be just under £200. Regardless, it is another thing to bear in mind when deciding whether the bond is right for you or not.

What alternatives are there?

There are a few similar products available, which offer certain advantages over the NS&I bond. For example, The Secure Trust offers a 2% three-year bond, and has a maximum limit of £1 million. The OakNorth Bank also has a three-year bond, but offers an interest rate of 1.91% and a maximum limit of £100,000.

With inflation expected to rise even higher than 2.3% this year, the NS&I bond won’t beat it, but could lighten the blow of a ‘real terms’ loss considerably, compared to other savings accounts available. A higher savings limit would be appreciated by some, but modest savers will benefit from a secure place to store their money.