Do investors really need a safety net when they haven't got far to fall?
Julian Knight looks at the flight into National Savings and asks if security justifies the returns you may sacrifice
Sunday 01 February 2009
An economic crisis produces few winners, but one institution that has benefited is the 150-year-old National Savings & Investments (NS&I). Over the past 18 months, the government-run organisation has seen a steady rise in customers and deposits as spooked savers look to the safety-first option.
Initially it was the run on Northern Rock in the summer of 2007 that sparked a flurry of deposits with NS&I, but since then, nearly every new twist and turn in the credit crunch drama has led to an uptick in savers' cash flowing in. The latest available figures show the amount of new money paid into NS&I increasing by 17 per cent year on year. And the company that brings us premium bonds plays to its perceived strengths: the home page of its website promises "100 per cent security for your money".
But with so many people investing their faith as well as their money, are the guarantees offered by NS&I all they are cracked up to be, and are depositors missing out on more competitive deals for all for the additional safety supposedly offered by the organisation?
"Why bother with NS&I if there are better offers elsewhere?" asks David Kuo, a savings and investment expert at the financial advice site Fool.co.uk.
"The truth is that, as a saver, you can achieve the same amount of security by putting your money into the nationalised Northern Rock. What's more, the Government has already shown that it will not allow a UK bank to fail, no matter what the price. Therefore, all the banks, in effect, have the same backing as NS&I," he says.
At present, the UK's Financial Services Compensation Scheme (FSCS) underwrites the first £50,000 of cash held on deposit in British banks and building societies. The existence of this pledge in the event of a financial institution failing has helped prevent any further runs on UK banks. The FSCS compensation package was increased from £35,000 last year.
"Before the compensation limits were upped, there was an argument to be made for National Savings as the ultimate safety-net option. Now, though, that isn't the case," says Mr Kuo. "There is nothing special about the safety net offered by NS&I and savers need to bear in mind that the products really aren't much to write home about either.
Likewise, Darius McDermott from broker Chelsea Financial Services thinks NS&I has little to recommend it, even in the harsh new world of the credit crunch. "I have never been a fan," he says. "Take premium bonds, for instance: they are nothing more than a lottery. They're a bit of fun but returns are purely down to chance. That is not an investment."
A fortnight ago, it emerged that NS&I was preparing to cut bond prizes. From April, it seems likely the lowest-value award that can be won through premium bonds will fall from £50 to £25. And over the past two years, the overall prize fund available has slumped from £114m a month to just £58m. "If you have average luck in winning prizes then the annual yield on premium bonds is around 1.8 per cent a year, which is poor. And these returns are likely to fall further in April," says Mr Kuo.
However there are some experts who are willing to bang the drum for the organisation. "Let's face it: NS&I is a popular brand with consumers. They see it as safe and a bit different, particularly in the case of premium bonds," says Adrian Lowcock from independent financial adviser Bestinvest. "Having a base layer of some NS&I products can play its part when constructing a portfolio of savings and investments. In terms of their competitiveness in the whole market, NS&I products are a mixed bag – some good, some not so good," he says.
Near the top of Mr Lowcock's list of products that cut the mustard are index-linked savings certificates. These promise to pay 1 per cent above the inflation-linked retail prices index (RPI) for either a three- or five-year term. Returns are tax-free and it's possible to invest up to £15,000 each time a new savings certificate is issued.
"This product has quite a bit going for it," Mr Lowcock explains. "The capital is 100 per cent guaranteed and the investor can rest assured they will receive returns that beat inflation. In addition, the interest is tax-free, which for a higher-rate taxpayer means they are boosted by 40 per cent. Finally, because you're allowed to pay in £15,000 whenever a new certificate comes out, it's possible to shelter a large sum of money from the taxman."
One downside is that the RPI, to which the return on the bonds is linked, is currently falling at a very fast rate and is forecast by some to dip below zero before the end of the year – though this doesn't mean bond returns will sink so far. "There is a collar in place which means that even if the RPI goes below zero, the investor will still receive the 1 per cent bonus," says Mr McDermott. Longer term, he thinks that having an inflation-beating guarantee could prove useful: "Oil prices may well come back a bit, which will push the RPI higher. and the fact that the Government is pumping money into the economy is also inflationary. However, we are quite a way from a scenario where having an inflation guarantee is key."
Outside the index-linked certificates, Mr Lowcock offers a guarded appreciation of NS&I's Direct individual savings accounts, which have a base rate guarantee built in.
"National Savings says it will pay 0.3 per cent above the Bank of England base rate and that is a welcome bit of surety. But this is still a long way off being a best buy."
He adds that the NS&I Children's Bonus Bond is also paying a good rate at 2.85 per cent. However, when it comes to investing for kids over the long term, Mr Lowcock, like most independent financial advisers, believes share investment offers a better average return than simply putting the money in a savings account. What's more, the rate on the bonus bond is fixed for a five-year term at what could prove a historically low level.
Pickings for savers are relatively poor among the other NS&I products. Its range of Guaranteed Income Bonds currently pay between 2.25 and 3.05 per cent, depending on how long the cash is tied up for. The returns are taxable and are comfortably behind the best buys on the market . For instance, reports financial information provider Moneyfacts, Wesleyan is paying 4 per cent on its two- and three-year bonds, while Nationwide offers 3.50 per cent on a four year fix.
But in truth NS&I isn't meant to lead the savings and investment markets. "They have to strike a balancing act: the Government wants savers' money but it doesn't want to take too much out of the banking system," Mr Lowcock points out. "Therefore, they keep their rates below the most competitive accounts.
"The selling point then becomes the name and the safety-first angle."
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