In a move described by some commentators as ‘savage’, National Savings & Investments (NS&I) has slashed interest rates across its product range.
In this video, I explain what’s happening at NS&I and discuss some of the considerations for savers who are thinking about moving their money.
The big news in the world of personal finance this week is the savage series of interest rate cuts at National Savings & Investments, going as low as 0.01% for some products.
Savers flocked to NS&I during the pandemic, for its perceived level of financial security; products there are backed by HM Treasury, so don’t rely on the £85,000 per saver deposit from the Financial Services Compensation Scheme (FSCS).
But the newly announced interest rate cuts will prompt many savers to shop around and find better deals for their cash.
On 24th November 2020, NS&I variable savings products will see their rates cut as follows:
-Income Bonds from 1.16% to 0.01%
-Direct Saver from 1% to 0.15%
-Junior ISA from 3.25% to 1.5%
-Direct ISA from 0.9% to 0.1%
Also from 24th November, maturing fixed rate products will experience an interest rate cut too.
-1 year Guaranteed Growth Bond from 1.1% to 0.1%
-1 year Guaranteed Income Bond from 1.06% to 0.06%
The interest rate used to calculate prizes for Premium Bonds will be cut from December 2020, falling from 1.4% to 1%.
This prize pot interest rate cut means 1 million fewer Premium Bond prizes a month from December, with the odds of winning a prize cut from 24,500 to 1 to 34,500 to 1.
If you hold a savings product with National Savings and you are thinking about your next steps, there are a few things to consider.
Firstly, it always makes sense to shop around when it comes to cash savings.
Banks, building societies and others have a nasty habit of luring in customers with attractive interest rates, only to gradually reduce these returns over time. You are rarely rewarded for loyalty.
Secondly, keep in mind financial protection limits.
If you’re using NS&I because your savings exceed the FSCS deposit protection limits, then you will need to spread your cash around between the different UK authorised banking institutions, to take advantage of £85,000 worth of coverage with each.
While we don’t have any immediate concerns about the financial strength of the UK banking system, it helps to sleep at night to know your money is covered should a bank or other financial institutions go bust.
Thirdly, be careful about taking on additional risks when moving your money away from NS&I, especially when searching online for better deals.
Moving from NS&I to a peer-to-peer lending (innovative finance) product or a ‘mini-bond’ might look attractive at a headline rate level, but means exposing your capital to a significantly greater, and often unquantifiable, level of risk.
The outlook for interest rates in the medium-term is for rates to remain low, and possibly even go negative as early as next year. It all depends on how the economy performs.
There are tough times ahead for savers.
In the long-term, money is generally best served when invested, rather than held in cash and subjected to the erosion of price inflation.
Before moving from cash to investments, you need to think very carefully about your attitude to risk, capacity for risk, and your need for risk – which is best established by constructing a financial plan.
Don’t move from cash savings to investments until your financial plan has identified the return you need on your money to achieve your goals in life.
