Green bonds: NS&I will pay just 0.65% over three years

NS&I’s hotly anticipated green bonds go on sale today with many savers likely to be less than impressed by the paltry rate on offer. 

The three-year bonds will pay just 0.65 per cent – meaning savers filling up the flagship accounts could face a £3,600 penalty for choosing it over what’s available elsewhere, if they max out the limit allowed to go in. 

The landmark product launching less than two weeks ahead of the Cop26 climate conference is seen as giving savers an opportunity to back the Government’s green agenda and put their money to work in the fight against climate change. 

However, one saving expert says at these rates, the Treasury will be lucky to rake in £100million of the £15billion it is aiming for from everyday savers. 

Rate flop: The best buy three year fix is 1.81% compared to the 0.65% that’s on offer from NS&I

Green projects like zero-emissions buses, offshore wind and innovative low-carbon technologies will be eligible for funding, along with programmes to help Britain  adapt to changing climate like improved flood defences.

The bonds, unveiled in the spring 2021 budget, will be on sale for at least three months, with a minimum investment of £100 required and a maximum limit of £100,000 per person.

The full amount deposited will be held for three years and cannot be withdrawn during this time.

But while the bonds offer the chance for savers to ‘green’ their finances, there is an expectation that many savers will shun the product.

Andrew Hagger, personal finance expert from Moneycomms said: ‘We knew these bonds were on the cards but no announcement was made on the rate until now – and perhaps you can see why – 0.65 per cent is way out of kilter with the market.

‘I appreciate that the Government is looking to fund essential green projects, but at a time of raging inflation where consumers are being squeezed financially from all angles, I can’t see people rushing to hand their cash over to the government at such a heavy discount.’

Type of account (min investment)                   0% tax 20% tax 40% tax
THREE YEARS                  
Al Rayan Bank (£5,000+) (3)                    1.81  1.45  1.09 
Gatehouse Bank (£1,000+) (3)                    1.78 1.42 1.07
QIB (UK) (£1,000+) (3)                    1.77 1.42 1.06
Close Brothers (£10,000+)                    1.65 1.32 0.99

The market leading three year fixed rate bond currently pays 1.81 per cent – almost three times more than NS&I’s flagship deal, meanwhile the latest inflation figure is 3.1 per cent.

Not only does the 0.65 per cent rate fall a long way short against equivalent deals on the market, it also only just matches the top paying easy-access deals, which won’t require savers locking their money away for three years.

Savers can grab a 0.65 per cent easy-access rate from Coventry Building Society and Family Building Society.  

A saver making full use of the maximum limit allowed and depositing £100,000 in the green savings bonds would see a return of £1,969 after three years.

Were they to opt instead for the current best buy three fixed rate bond offered by Al Rayan Bank they could instead expect a return of £5,576 over three years.

If a saver deposits £10,000, they could expect to see a return of just £197 over three years when opting for the NS&I green bonds compared to a possible £558 in the independent This is Money best buy tables. 

NS&I Green bonds vs open market over 3 years
Deposit amount NS&I Green bond paying 0.65% Best buy 3 year bond paying 1.81%  
£1,000 £19 £56   
£5,000  £98  £279   
£10,000  £197  £558   
£25,000  £492  £1,394   
£50.000  £984  £2,788   
£100,000  £1,969  £5,576   

James Blower, founder of the Savings Guru said: ‘The rate of 0.65 per cent is beaten by over 50 providers in the market.

‘While the aim of the bonds is very noble, I think they have misjudged how much savers will be prepared to forgo on rate to support green causes.’

However, given it is an NS&I product – brand that savers trust – and fully backed by the Treasury, there will likely be some interest regardless.

And with demand for environmentally friendly investments growing, particularly amongst younger people, the Government may be confident the bonds offer the right balance to eco-conscious savers looking to generate both financial and green returns on their money. 

The Government claims that around four in five of people aged between 25 to 44 would be interested in the concept of a green savings product.

It also found that 42 per cent of 18 to 34-year-olds would be willing to accept a lower return on their savings if they knew their money was being put towards green projects – however, it didn’t specify how low a return.

Money held in NS&I's green bonds will go towards green projects such as offshore wind.

Money held in NS&I’s green bonds will go towards green projects such as offshore wind.

It remains to be seen whether it being handles by NS&I – which suffered customer service problems in the pandemic – and the green credentials of this product will be enough to lure in savers. 

What is certain, however, is that industry experts believe the paltry rate on offer will fail to attract the targeted amounts from savers. 

‘I’ll be astonished if they attract £100million at these rates,’ said Blower, ‘let alone the £15billion that is being targeted.’

‘My advice to savers is to avoid these green bonds as the Treasury will surely have to rethink their pricing and, in the meantime, save with one of the best buy rates and donate your interest to green causes instead.’

For those who are keen to save ethically, there are also some alternatives. 

For example, you could choose a Triodos ethical savings bond, fixed for a year at 0.4 per cent. 

Gatehouse Bank also offers a three-year fix at 1.78 per cent that will plant a tree in UK woodlands for every account opened. It’s one-year fix pays 1.3 per cent.

Many had hoped that the rates on offer may be market leading, such as the 65+ Guaranteed Growth Bonds – better known as pensioner bonds – which launched in January 2015. 

In contrast, these offered 4 per cent over three years – and were so popular, NS&I struggled to keep up with demand, with a website crash and phonelines jammed. 

They became one of the fastest selling savings product of all time. Even the underlying rate on Premium Bonds – at 1 per cent – are higher than the green bonds on offer.

Last month, the Government sold £10billion of its first ‘green’ gilt, after attracting more than £100billion worth of bids from investors.

The 12-year gilt maturing in July 2033 marked the biggest single sale by a sovereign issuer, topping the previous Є8.5billion record set by Italy in March.

The gilt will pay a coupon of 0.875 per cent and has been priced to give a yield of 0.8721 per cent.