Are pensioner bonds to blame for NS&I Isa rate cut?
15 September
"More than 400,000 savers are to have their incomes reduced", The Times reports, after NS&I "unexpectedly cut the interest rate on its tax-free cash Isa".
The Government-backed lender will reduced the rate from 1.5 per cent to 1.25 per cent from November, following an earlier cut from 1.75 per cent in February.
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
SUBSCRIBE & SAVE
Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
It said the "difficult" decision had been taken because its accounts had spent too long at the top of best buy tables, challenging its mandate to ensure it does not upset competition in the banking sector.
According to Moneysavingexpert, the account is currently the second best paying Isa that allows unlimited penalty-free withdrawals. The best rate is the 1.65 per cent available from Punjab National Bank, although with only seven branches across the UK this will not be accessible to most.
Virgin Money pays 1.51 per cent for its easy-access Isa, but if you take any more than three withdrawals the interest rate is reduced to 0.75 per cent.
The decision to cut rates could also be to do with hugely popular pensioner bonds, however. These accounts, which offered by far the best rates for over-65s, finished in May, but hundreds of millions pounds' worth of sales in the final two months were counted towards this year's 'net funding target'.
The limit is another measure to ensure NS&I does not impinge on competition and this financial year requires it to take in no more than £10bn more than it pays out.
In the first three months of the year alone NS&I took in a net £5.4bn, with inflows boosted by an increase in premium bond sales of £9.1bn. NS&I typically withdraws offers or reduces their attraction to stem inflows, ensuring it does not take too large a share of the market.
NS&I's direct Isa was rolled out in 2013, after it disallowed Post Office withdrawals and transferred savings to the online and telephone-access accounts. New Isa sales had been stopped in 2009, again due to high inflows threatening funding targets.
Pensioner bonds: NS&I smashes record funding target
26 June
'Unprecedented' demand for market-beating pensioner bonds led National Savings and Investments to smash its record funding target, netting more than £18bn from British savers in the past year.
NS&I says in its latest results that the huge volumes invested into the immensely popular bonds, which paid out 4 per cent over one year and were open only to those over the age of 65, pushed it to a net funding figure of £18.2bn for the last financial year, well above its target of £13bn.
The net funding figure reflects the amount taken from savers minus what the organisation paid out in returns. It is typically set much lower to prevent the provider, which has a competitive advantage due to being backed by government funding, distorting market competition, reports the Daily Telegraph. In recent years the net funding target was held at zero to encourage savers to turn to banks and building societies, which often meant NS&I was forced to pull products after only short offer periods.
Pensioner bonds were introduced by the chancellor at the last Autumn Statement in December and initially commanded £10bn in government funding, but the programme was later extended. It eventually ended in May, just after the election, having raised £13.5bn.
Sales for April and May will count towards the net funding target for the coming financial year, which has been set at a lower £10bn.
Elsewhere NS&I also revealed it has ended its association with the Post Office and will be pulling over-the-counter sales of premium bonds, the last remaining product sold through the organisation, from the end of July. According to the Telegraph the move ends an association that dates back to 1861 with the launch of the Post Office Savings Bank, which was split in 1969 to create the National Savings Bank, later renamed National Savings & Investments.
The Mirror says the move will be a blow to the Post Office, which is being privatised by the Government and is in effect losing another government contract worth £11.6m last year.
Pensioner bonds: what next for high-interest savings?
20 May
Pensioner Bonds were withdrawn from the market last week, having become the biggest selling financial product in British history.
The 65+ Guaranteed Growth bonds, to give them their proper title, attracted deposits of over £13bn from more than a million older savers in the four months they were available.
It's not hard to see the attraction of the bonds: savers benefit from interest rates of 2.8 per cent over one year and 4 per cent for the three-year bonds. That is far higher than anything available from banks and building societies. So, where else can you find a decent return for your savings?
1. Cash Isas
Interest earned on pensioner bonds is subject to tax so the return after tax on the three-year bond is 3.2 per cent for a basic-rate taxpayer or 2.4 per cent for a 40 per cent income taxpayer.
Put your savings into an Isa and you don't have to pay income or capital gains tax on your returns. This means you can very nearly match the net return of a pensioner bond with some accounts. The State Bank of India pays a rate of 2.5 per cent on its 5 Year Cash Isa Fixed Deposit, but you'll need to be able to deposit £15,000. Alternatively Metro Bank pays 2.25 per cent on its five-year bond, which can be opened with as little as £1.
If you don't want to lock up your cash for five years the best rate you can get on a three-year fixed Isa is 2 per cent from Aldermore. Or the best rate for a one-year bond is 1.9 per cent from Al Rayan Bank.
2. Stock market Isas
If you are prepared to shoulder a little risk you could opt for an investment Isa and put your money in stocks and shares. Over the long term the stock market typically outperforms cash so you could make much bigger returns. For example, the FTSE 100 has risen by 32 per cent over the past three years so investing in a FTSE tracker could prove rewarding.
3. Traditional savings accounts
If you have used up your £15,240 Isa allowance for this tax year, and you don't want to invest in the stock market then you could play it safe with a traditional savings account. Unfortunately, you won't be dazzled by the interest rates on offer.
The best rate available is 3.3 per cent for a five-year bond from Agri Bank a Malta-based bank. The bank isn't covered by the Financial Services Compensation Scheme but is supported by Malta's own version if the bank were to go bust.
The next best alternative is Secure Trust Bank, which is paying 3.01 per cent on its five-year bond.
4. Peer-to-peer
Finally, if you are prepared to take on a little more risk than a standard savings account you could invest in peer-to-peer lending. This is where the money you deposit is lent out to individuals and businesses. The rates on offer are impressive: Ratesetter says you'll earn up to 6.1 per cent over five years or Zopa offers 4 per cent over three years.
However, your money is not covered by the Financial Services Compensation scheme. This means if the companies went bust you could lose your savings. The firms do have funds in place to cover your savings if a borrower fails to repay and as yet no saver has ever been left out of pocket.
Pensioner bonds: 'wait until next week' for new tax break
2 April
Anyone who is planning to invest in pensioner bonds may be better off waiting until the new tax year begins on 6 April, financial advisers have said.
Pensioner bonds, which will remain on sale until 15 May, offer interest of up to 2.8 per cent over one year or 4 per cent over three years to anyone over the age of 65. Applicants can invest up to £20,000, split between three-year and five-year bonds.
Interest derived from pensioner bonds is taxable, but potential investors can reduce their tax bill by waiting until next week before buying in to the scheme.
"If you delay buying the bonds until the new tax year starts on 6 April, you can use the new £1,000 personal savings allowance to offset tax on your interest," Money Observer says,
That's because a tax cut for savings introduced in the Budget earlier this month doesn't come into force until April 2016. From then, basic-rate taxpayers will benefit from a £1,000 tax-free allowance. Higher-rate taxpayers will get £500 before they start paying tax.
Holders of pensioner bonds taken out from 6 April this year will not receive interest until April 2016, and will therefore benefit from the new rules, saving up to £56 if they have invested the maximum £10,000 in a one-year bond.
Pensioner bond fact file:
- Two bonds are available, a one-year bond and a three-year bond
- Anyone over 65 can invest up to £10,000 into each type of bond
- One-year bonds pay 2.8 per cent interest; three-year bonds pay four per cent - much higher than most commercial savings accounts and bonds
- Savers do pay income tax on their interest
- Cash invested in pensioner bonds can be taken out at any time, but at a cost of 90 days' interest on the withdrawn funds
How to minimize capital gains tax on investments
The pros and cons of investing in crypto
How do presidential elections affect the stock market?
A beginner's guide to passive income
4 tips to keep your emotions out of investing
4 tips to minimize taxes when investing
4 tips to build an investment strategy for the long term
What to know amid the rise of separately managed accounts
