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can invest from £100 a month – or £50 if you set up a standing order – up to a maximum holding of £30,000, which can be withdrawn at any time.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.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
PROMOTED VIDEO
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Life and Style
fashion David Beckham fronts adverts for his underwear collection
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
art
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
News
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
i100
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
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

    Soft Developer (4.0, C#, Windows Services, Sockets, LINQ, WCF)

    £65000 - £75000 per annum: Harrington Starr: .NET Developer (4.0, C#, Windows ...

    C# Developer -Winforms, VB6 - Trading Systems - Woking

    £1 per annum: Harrington Starr: A leading financial software house with its He...

    C #Programmer (.Net 4.0/4.5/ C#) -Hertfordshire-Finance

    £45000 - £50000 per annum: Harrington Starr: C #Developer (.Net 4.0/4.5/ C#, A...

    JQuery Developer JQuery, UI, Tomcat, Java - Woking

    £1 per annum: Harrington Starr: JQuery Developer JQuery, UI, Tomcat, Java - Tr...

    Day In a Page

    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
    eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

    eBay's enduring appeal

    The online auction site is still the UK's most popular e-commerce site
    Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

    'Lack of ethnic minority and black faces on TV is weird'

    Culture Minister Ed Vaizey calls for immediate action to address the problem
    Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

    Magic circles: Artist Olafur Eliasson

    Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
    Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

    Josephine Dickinson: 'How I discovered a new world of sound'

    After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
    Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

    Greggs gives lesson in crisis management

    After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
    Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

    Matthew McConaughey sings the praises of bumbags

    Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
    7 best quadcopters and drones

    Flying fun: 7 best quadcopters and drones

    From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
    Andy Murray: I quit while I’m ahead too often

    Andy Murray: I quit while I’m ahead too often

    British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home