National Savings launches top-rate bond

National Savings & Investments, the government deposit-taker, is paying a market-leading 3.95 per cent on a one-year bond – a move that is expected to attract huge inflows from savers seeking higher interest rates.

The new issue of NS&I’s fixed-rate Guaranteed Growth Bond is the highest one-year rate to be offered by any provider in recent months. Savers are also protected by the Treasury’s unlimited guarantee for cash held with NS&I, rather than the £50,000 limit with most banks and building societies.

Analysts predict that savers will swarm to the offer, but the Building Societies Association expressed concern that NS&I’s “raid” on the savings marketplace would take funds away from societies that they could be lending out to mortgage borrowers.

Andrew Hagger of Moneynet.co.uk, the comparison service, said: “The combination of a great rate and security is sure to be a big hit.”

“With a maximum investment level of £1m and the added benefit of 100 per cent security, regardless of balance, it will be particularly appealing to those who have concerns regarding the standard £50,000 compensation limit available from most other institutions.”

As well as this top 3.95 per cent rate, which is paid at maturity, for savers wanting income there is a 3.85 per cent Guaranteed Income Bond version that pays interest monthly.

The next highest payers over one year – State Bank of India (3.75 per cent) and Bank of Cyprus (3.7 per cent) – are foreign-owned banks, while a leading provider such as Halifax is offering 3.5 per cent.

“NS&I will own this space,” said Kevin Mountford, head of savings at Moneysupermarket.com. “This ticks all the boxes.”

He said that the new bonds, which NS&I confirmed will be available for a few weeks at least, were likely to convert many savers who previously have kept their cash on instant access.

Top variable-rate accounts now offer up to 3.3 per cent but are not expected to go much higher in the short-term. With the 0.5 per cent base rate forecast to remain unchanged until well into next year, savers locking into the new one-year rates face little risk of their returns being overtaken by instant-access offers. The bonds can also be cashed in early at a 90 days penalty.

In addition, NS&I has launched two, three and five-year bonds at rates of 4.15 to 4.6 per cent. Of these, its 4.25 per cent over two years, payable at maturity, is just below the top deals over this term, but the other rates are less competitive.

David Black, banking consultant at Defaqto, pointed out that while most savings bonds were one-year deals, recent fixed-rate competition has been focused on longer-term rates, where up to 5.3 per cent is still available over five years.

An NS&I spokeswoman said the new bond issues, some of which are yielding nearly 3 percentage points more than previous NS&I rates, were aimed at reversing savings outflows from the government-owned provider – including a £1bn net withdrawal of cash by accountholders in the second quarter of this year.

The higher rates also reflected more cost-effective distribution: the bonds are only available directly from NS&I and no longer through the Post Office.

Mountford said: “NS&I benefited massively from the ‘flight to safety’ last year. But as the market has stabilised it will have struggled (to attract and retain savings).”

With limited growth in the overall savings market, Adrian Coles, director general of the BSA, said he was a “bit concerned” at NS&I’s “disruptive” hike in rates, which would lead to savings outflows from societies.