National Savings is both reducing and increasing interest rates. But its real rate challenge lies ahead.
In September National Savings & Investments (NS&I) announced that they would be cutting the rate on its Direct Saver cash ISA from 1.50% to 1.25% from 16 November. The reduction means that NS&I will relinquish their position near the top of the instant access ISA league tables. The move was not completely unexpected: NS&I do not normally aim to be chart-toppers as they rely heavily on the Treasury-backed security message rather than offering the best rate. Equally, NS&I have no great need to haul in money, given their success in fund-raising via the 65+ bonds earlier in 2015.
Something that might also have encouraged NS&I’s action is the arrival next tax year of the personal savings allowance, which will allow basic rate taxpayers to earn £1,000 of interest tax-free and higher-rate taxpayers £500 (additional-rate taxpayers receive no allowance). Bank and building society accounts will pay interest gross from next April, obviating the need for a tax reclaim, so the appeal of the cash ISA will be much reduced.
In October, NS&I took a step in the opposite direction and raised rates for its guaranteed income and growth bonds. These are not on public offer, but are available for re-investment by existing maturing bondholders. The rates are much more in line with the traditional market positioning of NS&I. Even after a 0.2% increase they can easily be beaten by shopping around.
A more challenging test for the NS&I rate setters is what to do in January 2016, when the one-year version of the 65+ bond starts to mature. This paid 2.8% – well above market rates then and now – and was widely seen as a pre-election offering to the part of the population most likely to vote. Together with a three-year version, in total the 65+ Bond raised over £13bn, a useful contribution to the government’s borrowing requirement. Will the Chancellor again force NS&I to offer unbeatable rates to keep the cash or, post-election, will he decide it is cheaper to use the gilts market, even over 50 years?
If, as seems likely, he chooses the latter and you are left with an unexciting NS&I reinvestment option, please do contact us to discuss the alternatives.