An analysis of the new NS&I savings bond
Current Affairs

Is the new NS&I savings bond the silver bullet for savers?

Philip Hammond may look back on his rather acrimonious Spring Budget and feel the need to cringe. However, his debut performance as Chancellor at November’s Autumn Statement passed largely without controversy, as he announced a number of policies which were difficult to argue against.

Perhaps the biggest headline grabber of that particular day was his new flagship National Savings & Investments (NS&I) savings bond, which launched earlier this month. At the Autumn Statement, Hammond promised this new product would offer a “market-leading return”. Once the dust of the intervening months had settled, it was confirmed in March that this rate would be 2.2 per cent over a three-year term, although not without restrictions. The bond is available to anyone over the age of 16, and the maximum amount which can be sunk into it is £3,000, with the return only paid at maturity. The bond’s availability is also limited, with a total supply of £7 billion, and will only be in the offing for 12 months.

A pot of gold at the end of the rainbow?

Although no official figures are available, it is understood that these bonds have been flying off the shelves over the last few weeks. Indeed, one NS&I insider is quoted as saying “sales are going very well, as expected.”

In some respects, it’s not hard to see why. Currently the next-best three-year bond offers a return of 2 per cent (although Atom Bank has an app-only three-year bond paying 2.2 per cent in limited quantities), so the Chancellor has technically been true to his word with his promise that it would be a market-leading offering, and it will likely remain that way until stocks are depleted.

And in truth, countless millions are currently lying in derisory savings accounts paying interest as low as 0.01 per cent, so, given such a grim savings backdrop, the opportunity to store £3,000 of otherwise idle money in this particular account and earn up to £66 in interest per year (interest is paid gross, without tax deduction, and will thus count towards your Personal Savings Allowance)  makes sense. And of course, it must be added that the bond is 100 per cent backed by the Treasury, and is thus guaranteed.

The drawbacks

Yet perhaps the most depressing dampener of all about this savings bond is that inflation for March came in at 2.3 per cent – for the second month in succession at that – and projections are that this is likely to tend towards 3 per cent as the year goes on. This means that, in real terms, the new savings bond is a guaranteed loser – albeit by narrow margins.

Many believe that an increase in base rates as a result of inflation is an inevitability. But it must be pointed out that this particular NS&I offering is a fixed-rate bond, which means there will be no benefit whatsoever if/when the Bank of England decides to crank things up. Added to that, the trend among fixed-rate bonds has surprisingly coursed upwards, and significantly so, since the Autumn Statement, thus meaning the rates on the NS&I bond may well fall back into the peloton in the near future anyway.

And, regardless, the truth is that a limit of £3,000 will not leave the tectonic plates in danger of shifting as a result of this new arrival.

Final thoughts

It’s always easy to be cynical, and poke holes in financial products. Certainly in the context of a bleak savings landscape, it is good to see Government pioneering some alternatives. Let’s not forget the decent levels of success and acclaim the so-called ‘pensioner bonds’ enjoyed a couple of years ago, so it would seem that the dismay among savers and pensioners is a message which is being received by both the Chancellor and the Treasury.

But, on the NS&I savings bond, perhaps it was Moneysavingexpert’s Martin Lewis who said it best: “It's welcome but people won't be whooping.” 

Truth be told, if savers would like to earn real, inflation-beating returns, they will need to look further up the risk spectrum. Because if there is such a thing as a silver bullet within the savings market, it’s fair to say there isn’t presently one available. And the NS&I savings bond is no exception.

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Michael Todt

Mike joined Lending Works in early 2015 with a background in marketing and journalism. Having long held a passion for economics, he is now the chief contributor to the Lending Works blog, and regularly writes about all things peer-to-peer lending, fintech and personal finance.