NS&I boosts rates on its Direct Saver and Income Bonds

National Savings and Investments has increased rates on some of its savings accounts for the third time in four months.

Over the course of two rises towards the end of last year, the Treasury-backed bank upped the rate on its Direct Saver and Income Bonds from 0.1 per cent to 0.35 per cent.

As of today, both deals have been increased by a further 0.15 percentage points to 0.5 per cent.

Roughly 650,000 savers stand to benefit from the rate rise based on NS&I latest figures.

Anna Bowes, co-founder of Savings Champion said: ‘I expect NS&I savers will have a mixed reaction to this news – especially those who struggled to withdraw their cash when the rates fell to rock bottom levels back in November 2020.

‘But at this new level, the accounts are fairly competitive again, following an initial increase in December last year after the first Bank of England base rate rise – so they are bound to attract savers back – especially those with more than the Financial Services Compensation Scheme protection limit of £85,000.’

NS&I is currently on track to fall short of its annual fundraising target set by the Treasury for this financial year and is upping its rates in a bid to attract more cash from savers. 

Ian Ackerley, chief executive of NS&I said: ‘The new interest rates will ensure that our products are priced in line with the broader savings sector.

‘The increase will also help us to meet our annual Net Financing target for 2021-22 of £6billion, in a range of £3billion to £9billion.’

However, reaching its annual target will be a tall order based on its performance in the first half of this financial year.

Between 1 April and 30 September last year, NS&I savers deposited a net £600million – just 10 per cent of the £6billion target. 

However, an additional £1.6 billion has been deposited into NS&I by savers between the start of October and end of December, according to Bank of England figures.

James Blower, head of digital at Moneyfacts said: ‘NS&I will be close to getting to the £3billion bottom end of the range at the end of March. 

‘However, with rates nudging up elsewhere, and inflows to premium bonds slowing, I suspect they’ve seen it will be tight and have moved quickly to try to shore it up.’

Will the rate rise attract savers to join? 

NS&I will likely be hoping its established name and today’s rate rise will be enough to lure savers away from the big banks.

As many as 62 per cent of total savings are in easy-access accounts, according to analysis by Paragon bank, with a worrying 71 per cent of these easy access balances earning a rate of 0.1 per cent or less.

Given that personal savings at the end of last year totaled £1.755trillion, according to Bank of England data, this means there is considerable cash lingering in these subpar savings accounts.  

NS&I new rates will also be particularly attractive to savers with a lot of cash to stash away.

This is because savers can hold up to £1million in Income Bonds and £2million in the Direct Saver, all of which is protected by the Treasury.

This is much more than the £85,000 FSCS protection afforded per individual by most banks and building societies . 

The number of easy-access accounts with balances of £100,000 or more now account for a record 2 per cent of the easy-access market, according to Paragon Bank – up from 1.8 per cent in October 2020 and 1.6 per cent in October 2019.

However, James Blower is doubtful that the move will have the desired impact.

‘I think the move will help retain savers that are still there, but it won’t be enough to entice savers back who have left,’ said Blower.

‘There are still better offers to be had elsewhere and NS&I did significant damage to its brand with both the rate cuts of November 2020 and the poor levels of customer service it has offered around that period and since. 

‘A simple review of any ratings site or savings forum shows the level of anger felt by savers towards them and that will take significant change and time to reverse.’

How do NS&I’s new savings rates compare? 

Both NS&I direct saver and Income bonds allow savers to withdraw cash freely, as and when they wish.

As easy access deals go, it is comfortably ahead of the market average rate of 0.21 per cent according to the latest Moneyfacts data.

However, it also falls a long way short of the market leading easy-access deals.

Aldermore’s Double Access account pays 0.75 per cent, albeit limiting savers to just two withdrawals each year.

For a saver requiring greater freedom flexibility, Investec’s Online Flexi Saver pays 0.71 per cent, with no curbs on savers freedoms when it comes to withdrawing their cash.

The gap may sound slight to some, but for those saving large amounts, it could make a meaningful difference.

For example, someone depositing £50,000 in one of NS&I’s 0.5 per cent accounts will earn £250 in interest whilst someone depositing the same amount in Aldermore Double Access account could expect to earn £375 in interest.

‘Although the rates are competitive, better easy access accounts, paying over 0.70 per cent can be found elsewhere,’ says Bowes.

‘With inflation soaring, every penny in additional interest earned is important to at least mitigate the damaging effect that the rapidly rising cost of living can have.’