Gauging the cost of the safety-first savings approach

National Savings & Investments could be what anxious investors are looking for. Chiara Cavaglieri reports

The political uncertainty of recent weeks may have come to a head, but as the economic drama unfolds in Greece and fears spread that the UK could face its own debt crisis, anxious investors will be looking for a safe haven.

National Savings & Investments (NS&I) has long been the first port of call for Britons looking for security. With a wide range of products to choose from, many of which are tax free and all of which enjoy 100 per cent backing from the Government, it's easy to see why.

"Premium bonds are by far our most popular savings product. There are currently more than 22 million customers holding almost £40bn of bonds," says NS&I's Gillian Stephens.

Instead of paying interest, these bonds are entered into monthly prize draws with tax-free prizes starting at £25 and winners selected at random by Ernie, the Electronic Random Number Indicator Equipment. You can invest from £100 a month – or £50 if you set up a standing order – up to a maximum holding of £30,000, which can be withdrawn at any time. But the big pull here is security. You don't lose your original investment and your money is 100 per cent safe, which is not something to be taken lightly in the current economic climate. Even better, as tax-free prizes, money invested in these bonds is sheltered from any increase in taxation.

However, as is often the case, investors seeking a safer place for their money will have to sacrifice returns. There is an enticing jackpot of £1m up for grabs but NS&I cut the number of these top payouts from two per month to just one. The monthly prize pot is based on interest paid on the total amount invested, which is currently pegged at 1.50 per cent, so each £1 bond has a one in 24,000 chance of winning a prize.

"Premium bonds are only really for those investors who do not need certainty of return. But they can work well for higher rate taxpayers who need a short-term home for some money, perhaps to pay a tax bill or because they are planning to move house," says Danny Cox from independent financial adviser Hargreaves Lansdown.

As well as the significant risk that you won't be a winner, the attraction of government backing is also questionable because the maximum investment is only £30,000. The Financial Services Compensation Scheme already protects up to £50,000 of your money invested in any other bank or building society, so as long as you don't hold more than £50,000 with one banking group, the interest rate should be your primary concern.

Another problem with premium bonds is the risk of inflation. If you don't win enough prizes to protect your savings, the real value of your bonds will decline over time and you'll actually lose money. However, another of NS&I's tax-free products, the index-linked savings certificates, offers a solution to this problem.

These pay a fixed rate of interest on top of the rate of inflation to ensure that your money keeps on top of rising prices. The latest offering is a three- or five-year bond paying RPI plus 1 per cent. For both accounts you can invest between £100 and £15,000 per issue. The only stipulation is that the bonds must be held for at least one year to be eligible for index tracking; otherwise, returns are tax-free and index-linked is added annually.

"The fact that they're tax-free means that for higher-rate taxpayers the certificates will be difficult to beat during times of inflation," says David Black from analysts Defaqto.

With the RPI now at 4.4 per cent, these accounts are faring well against other taxable investments, particularly for higher-rate taxpayers who would currently have to earn 9 per cent to get the equivalent return after tax.

During periods of low inflation, these accounts won't be anywhere near as impressive, so it's worth looking at some of the other tax-free products. The Direct ISA is one of the most impressive in the range. This pays 2.5 per cent on deposits from £100, one of the highest easy-access rates on the market. The only significant downside is that it doesn't allow transfers in and it can be beaten by Barclays' Golden ISA paying 3.06 per cent but this includes a 1 per cent bonus for 12 months.

Unlike its competition, NS&I has the advantage of extending its tax-free range beyond just the cash ISA.

"This means that they can offer a much lower rate than the banks and building societies but can still be competitive for taxpayers, especially higher-rate taxpayers," says Mr Black.

You can currently invest between £100 and £15,000 in the fixed interest savings certificates for tax-free returns on a two-year bond paying 1.25 per cent and a five-year bond paying 2.25 per cent. A higher-rate taxpayer would have to earn an equivalent gross rate in a taxable account of 2.08 per cent and 3.75 per cent respectively to match these returns which are few and far between in the current market.

However, with both accounts, early withdrawal results in a reduced interest rate. While both offer fairly competitive rates, even when you take into account the tax-free status, they are still not best-buys. State Bank of India's two-year fixed bond pays 4 per cent gross and its five-year bond pays 5 per cent gross, both on deposits of at least £1,000.

Similarly, the children's bonus bonds, designed for savers under the age of 16, pays 2.5 per cent tax-free, fixed for five years, on deposits of between £25 and £3,000, but this can easily be beaten by Yorkshire Bank's child savings bond, paying 4.45 per cent on balances of £50.

So, if investors can't expect the best rates, what is the appeal? One significant factor behind the attraction of many NS&I products is access, particularly with some of its taxable accounts such as the easy access savings account.

This pays between 0.3 per cent and 0.7 per cent (interest is paid gross so you'll need to declare earnings on your tax return) and can be opened with only £100 by savers aged 11 and over. There are no restrictions on additional deposits or withdrawals as long as there is at least £100 in the account at all times. Importantly, the account comes with a cash card that allows instant access to funds. There is also the Investment Account paying up to 0.3 per cent, which comes with a passbook, and with both accounts, savers can make withdrawals through the Post Office network, which is more convenient for many people.

Simplicity is yet another element to the NS&I range of products. The Direct Saver, for example, is a no-notice account offering an attractive rate of 2 per cent on deposits of only £1. Although this isn't the best rate available, many investors are far more concerned about finding a straightforward account.

"Unlike many of the top paying accounts, there are no temporary bonuses that will fall away sharply, nor are there any restrictions on accessing your money. Savers looking for a straightforward, no-hassle account will likely find these accounts highly appealing," says Michelle Slade from comparison site Moneyfacts.co.uk.

Expert View

Michelle Slade, Analyst, Moneyfacts

National Savings & Investments remains popular with savers, particularly older people, as it's a brand they know and trust. Many of the accounts can be opened and operated in local post offices, which for some is a more convenient way of managing their money. NS&I is backed by HM Treasury, meaning all money invested with it is 100 per cent protected, which is an important factor to many savers who were concerned by the failure of Icelandic banks, among others.

Suggested Topics
PROMOTED VIDEO
News
video
Life and Style
tech
Sport
Jodie Stimpson crosses the finishing line to win gold in the women's triathlon
Commonwealth games
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Arts and Entertainment
Jamie Dornan stars as Christian Grey in the Fifty Shades of Grey movie
filmFirst look at Jamie Dornan in Fifty Shades of Grey trailor
Life and Style
Phillips Idowu, Stella McCartney and Jessica Ennis
fashionMcCartney to continue designing Team GB Olympics kit until 2016
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
Sport
Farah returns to the track with something to prove
Commonwealth games
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Life and Style
fashion Designs are part of feminist art project by a British student
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Junior Research Analyst - Recruitment Resourcer

    £18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

    Senior Analyst - Financial Modelling

    competitive: Progressive Recruitment: This really is a fantastic chance to joi...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Day In a Page

    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
    Climate change threatens to make the antarctic fur seal extinct

    Take a good look while you can

    How climate change could wipe out this seal
    Should emergency hospital weddings be made easier for the terminally ill?

    Farewell, my lovely

    Should emergency hospital weddings be made easier?
    Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

    Crowdfunded novel nominated for Booker Prize

    Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
    Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

    Vladimir Putin employs a full-time food taster

    John Walsh salutes those brave souls who have, throughout history, put their knives on the line
    Tour de France effect brings Hollywood blockbusters to Yorkshire

    Tour de France effect brings Hollywood blockbusters to Yorkshire

    A $25m thriller starring Sam Worthington to be made in God's Own Country
    Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

    Will The Minerva Project change the face of higher learning?

    The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
    The 10 best pedicure products

    Feet treat: 10 best pedicure products

    Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
    Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

    Commonwealth Games 2014

    Great Scots! Planes and pipers welcome in Glasgow's Games
    Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

    Jack Pitt-Brooke

    Manchester City and Patrick Vieira make the right stand on racism
    How Terry Newton tragedy made iron men seek help to tackle their psychological demons

    How Newton tragedy made iron men seek help to tackle their psychological demons

    Over a hundred rugby league players have contacted clinic to deal with mental challenges of game