Wipe the dust off that post office savings book

When I hear the name National Savings & Investments (NS&I), I usually brace myself for what's coming next. Because, in the personal finance market, NS&I products have long been uncompetitive, outdated and unimaginative.

When I hear the name National Savings & Investments (NS&I), I usually brace myself for what's coming next. Because, in the personal finance market, NS&I products have long been uncompetitive, outdated and unimaginative.

But this situation is, slowly, changing. Last week NS&I announced that it was raising its savings rates, which won't exactly cause sleepless nights for the market leader ING Direct since the internet bank is paying 4.41 per cent gross per annum. However, it does at least show willing.

NS&I is also considering new avenues for selling its products, by phone, internet and post. This is hardly revolutionary but it beats standing in a queue in your local high-street post office. And NS&I is also in talks with a supermarket (though it remains coy as to which one) about selling in-store.

But the really impressive thing NS&I has done is to take advantage of the fact that its products are backed by the Treasury. This enables it to offer tax-free savings, and it has decided to raise the limit on how much customers can invest tax-free in its Savings Certificates - from £10,000 to £15,000 from Thursday.

Given that the Chancellor of the Exchequer, Gordon Brown, is reducing the amount we can invest tax-free in an individual savings account (ISA) from April 2006, this is particularly good news. At the moment, ISA investors can put £7,000 into a maxi equity ISA; from 2006, this will be reduced to £5,000. The £3,000 you can currently invest in a mini cash ISA will fall to £1,000.

Perhaps NS&I's move is long overdue (the £10,000 limit was introduced in November 1991) but it should still be applauded. And it doesn't affect your ISA allowance, either. So if you invest in an ISA in any one tax year, you can also open up an index-linked or fixed-interest savings certificate too.

Of course, you aren't going to be able to retire on the proceeds: NS&I's Index-linked Savings Certificates move in line with the rate of inflation, paying guaranteed interest over three or five years. Fixed- Interest Savings Certificates offer a set return over two or five years.

This means a higher-rate taxpayer can earn 5.75 per cent per annum on the three-year Index-linked Savings Certificate, or 6.08 per cent per annum over five years (assuming in both cases that the retail price index rises by 2.6 per cent each year and tax rates don't change).

On its Fixed-Interest Certificates, rates are 3.05 per cent per annum over two years, or 3.25 per cent over five, which give an equivalent gross rate for a higher-rate taxpayer of 5.08 per cent and 5.42 per cent respectively.

Admittedly, there are better rates out there. Capital One Bank is offering a two-year fixed-rate bond at 5.2 per cent or five years at 5.6 per cent, but, of course, you will have to pay tax on the interest. Many other providers are also raising the rates on their fixed bonds: last week, Universal Building Society, Birmingham Midshires, Bradford & Bingley and Northern Rock all did this.

However, you know where you stand with NS&I. This explains why two million people already have Savings Certificates. Customers might not get the best rates but what you see is what you get.

For a start, there are no bonus rates included, so the rate of interest isn't going to fall dramatically after six months. The problem with a lot of new savings products is that they include these bonus rates to get them to the top of the "best buy" tables and attract business. But once the bonuses are removed, the rate looks distinctly less impressive.

Further, there are often complicated restrictions on withdrawals. Birmingham Midshires, for example, is offering a Telephone Extra account, which has a variable rate that is currently at 4.8 per cent. But this includes a 0.8 per cent bonus for nine months, and customers are allowed only three withdrawals within the first 12 months. It's hardly easy access, which is how it is marketed.

Perhaps it's not surprising, then, that so many people stick with NS&I. Not only are your savings protected from inflation and tax, but your money is secure because it is backed by the government. And if you can invest more cash tax-free and get higher rates at the same time, even better.

m.bien@independent.co.uk

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

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