Interest rates have been rising since late 2021, rising 14 times from an historic-low of 0.10% to 5.25% in September 2023. High street banks have, largely, been happy to pass higher interest costs down to mortgage holders. They have been less willing to pass down the benefits to those with savings accounts.
However, the UK government appears to have thrown the gauntlet down to the banking sector by increasing its NS&I rate. The state-owned savings bank now offers 6.2% on its one-year fixed rate Guaranteed Growth Bonds. Income bonds have also been increased.
Banks will now face greater pressure to raise their rates to avoid customers flocking to NS&I. However, before you rush into it, are there any potential risks or issues to consider? Below, our Carlisle team discusses how the 6.2% might affect savings and financial planning.
Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137
e: [email protected]
What the 6.2% NS&I means
It is no secret that the cost of living crisis has been putting financial pressure on households across the UK in recent years. To try and curb inflation and shore up household finances, the government is keen for people to save more. Yet banks have been widely criticised for not passing on successive interest rate rises to customers with savings accounts.
With its new 6.2% rate, however, the NS&I is offering the best deal to its savers since the 2008 Financial Crisis. Strategically, the move could help the government achieve two objectives. Firstly, it helps to raise more money from bond investors. Secondly, it adds pressure for the wider savings market to justify their rates and, hopefully, offer customers better deals.
Should I invest in NS&I?
The 6.2% rate may not stick around for long. So it is worth considering now whether it is a good deal. The NS&I target to raise money for the Government in 2023-24 is £7.5bn. Once it hits the target, it is unlikely to keep paying over the odds to draw funding.
One advantage of saving with NS&I is the increased level of protection on your deposits. If you bank with a regulated bank or building society, then if that institution goes bust you are covered by the FSCS (Finanical Services Compensation Scheme), however this is limited to a maximium of £85,000 per person. NS&I is different as they are backed by HM Treasury. As such, they guarantee 100% of everything invested in NS&I without limit. For example if you had £1m invested with NS&I it would be 100% guaranteed. So your money is guaranteed with NS&I, but what else is there to consider before investing?
An individual can currently buy up to £1m in Guaranteed Growth Bonds offering up to 6.2%. £500 must be invested at a minimum, and at the end of the 12-month period the saver can choose to withdraw his/her money or re-invest it.
Naturally, this time factor means that savers need to consider liquidity before buying into the NS&I deal. If you are likely to need the money within the next 12 months (e.g. to cover an emergency expense), then it may be better to build up your “buffer savings” in an easy-access cash account before turning to fixed-rate deals.
Another potential issue is tax. Each tax year, a basic rate taxpayer can earn up to £1,000 in tax-free interest under his/her Personal Savings Allowance (PSA). For someone on the higher rate, this threshold is £500. Therefore, savers need to be mindful of a potential tax liability if they invest large sums into the NS&I deal.
For instance, suppose you invest £10,000 in Guaranteed Growth Bonds offering 6.2%. When the bonds mature in 12 months, a total of £620 should be returned from interest. This might be fine for a basic rate taxpayer. Yet, for the higher rate taxpayer, this would go over their PSA.
If a higher rate taxpayer invested the full £1m limit into the 6.2% NS&I deal, then only £37,400 of the £62,000 interest earned would be taken home. The rest would be taxed.
Financial planning and NS&I
There are some ways to mitigate the impact of tax on savings/investments in NS&I. For instance, if you are married or in a civil partnership, then both you and your spouse/partner are entitled to your own PSA. Therefore, you could limit your overall household tax liability on interest from NS&I by allocating your funds between each of you, strategically.
For example, suppose you are nearing your PSA allowance for 2023-24 but your spouse (who is a basic rate taxpayer) has not used any of theirs yet. Instead of investing in the 6.2% NS&I deal yourself, you could both contribute to buying Guaranteed Growth Bonds in your spouse’s name – so he/she uses their tax-free £1,000 PSA.
Of course, the returns from cash savings and NS&I need to be balanced against the need to follow a long-term investment plan. Over many years, other asset classes – such as equities – potentially offer more growth potential for investors. By considering more assets this could open more opportunities to grow wealth with the help of an experienced financial adviser.
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.