Savings account Guides

National Savings & Investments

Hazel Cottrell hazel.cottrell@consumerchoices.co.uk

National Savings & Investments (NS&I) is the UK’s second largest savings institution, but why is it so popular? We look at the advantages and disadvantages of investing your cash in its products (Updated 9/9/09).

More than 30 million people save with NS&I. There are a variety of products available, from short term savings to long term investments and you can choose your own level of risk, from guaranteed returns to monthly chances of winning cash prizes.

In this guide we will look at the pros and cons of the products available and investigate whether this really is the best place for your money.

Advertisment

Compare Savings Accounts

• What is National Savings & Investments?
• How are the products different from standard savings accounts?
• Advantages
• Disadvantages
• What’s available?
• Premium bonds
• Recommendations

Back to the top

What is National Savings & Investments?

Originally called the ‘Post Office Savings Bank’, NS&I was set up by the government in 1861. The scheme serves two purposes:

1. To encourage ordinary wage earners to save for the future and to help them build up their savings securely.
2. To provide cost-effective financing for the Treasury. The money paid in by the public provides a fund which the government borrows from for public spending.

Basically, by saving with NS&I you are lending money to the government and in return you are guaranteed that your investment is secure. Anyone can save with NS&I, but there are certain criteria for specific products.

You can apply for NS&I products at a Post Office branch, by post, by phone or online through the National Savings & Investments website (www.nsandi.com)

Back to the top

How are their products different from standard savings accounts?

Standard savings accounts are held with banks and building societies which are private organisations. When you save your money with them, it is usually reinvested to generate profit which is then shared between the organisation’s shareholders (and/or members of the building society).

When you save with NS&I your money is used to finance government spending. You will still receive interest on your savings but unlike standard savings and investments, all money invested in NS&I is completely “capital protected”, which means you can rest assured that you will receive all your original investment back.

Back to the top

Advantages

• Unique - NS&I offers a range of savings and investments some of which, like savings certificates and premium bonds, are not available from other institutions.
• No Tax - Many of the products offered by NS&I are completely tax-free, which means you won’t have to pay any tax on the interest or cash prizes that you receive.
• Secure - Your money is completely secure because the government guarantees to repay it.

Back to the top

Disadvantages

• Interest rates – NS&I does not offer the most competitive interest rates on the market and if you save with NS&I you may have to trade high interest rates for security. However, be aware that the interest rates are generally better than they first appear because for many of the products you do not have to pay tax on interest earned. For example, 4% tax-free interest is equivalent to 5% interest before tax for a basic taxpayer and 6.67% interest before tax for a higher rate taxpayer.

Back to the top

What’s available?

NS&I are currently offering a wide range of products, both “easy-access” which let you take your money out whenever you want to and longer term investment schemes, where your money is invested for between one and five years.

Some of NS&I’s products are tax-free which mean you do not have to pay income tax or capital gains tax on any interest prizes you receive. These products include ISAs, premium bonds, savings certificates and children’s bonus bonds.

Other products are taxable which means you must pay interest in full and declare them on your tax return. These include savings accounts, income bonds, guaranteed income bonds, guaranteed growth bonds and guaranteed equity bonds.

Back to the top

Premium bonds

Most of the types of products that NS&I offers are available elsewhere, but premium bonds are a unique product, available exclusively from NS&I.

Premium bonds are not an investment, strictly speaking, because instead of paying interest, they offer savers the chance to win a tax-free cash prize each month.

A quarter of all money invested in NS&I goes into premium bonds and around 23 million people now hold premium bonds. You can invest up to £30,000 in bonds and must invest a minimum of £100 at a time.

Each bond costs £1 and each has an equal chance of winning when prizes are allocated. Each month more than a million prizes are paid out ranging from £25 to a jackpot prize of £1million.

The winning bonds are picked each month by a random number generator called “Ernie”. Many see premium bonds as a safe alternative to the National Lottery, because you are only gambling with your interest, not your capital.

The chances of winning are certainly more favourable – the odds of receiving a prize with each single bond in a single month are 36,000 to one.

You can cash in your bonds at any time without penalty and you will get back exactly what you put in. This does mean however that over time the value of your investment will be eroded by inflation.

Back to the top

Recommendations

NS&I is the most secure place to save and invest your money. Because it is backed by HM Treasury it really can guarantee that you get your money back no matter what happens. So, if you are fraught with anxiety about the safety of your cash and if super ultimate security is your biggest concern then NS&I might be for you.

However it must be stressed here that if you save with a bank or building society you are in fact completely covered by the Financial Services Compensation Scheme, which is implemented by the government, for any account up to £50,000. This means that if your bank or building society does go bust, you will get all your money back.

Therefore the levels of risk in saving up to £50,000 in a regular savings account and saving with NS&I are almost identical, and pretty much non-existent. The only difference is, it may take a while to claim back your £50,000 if your bank or building society does do a Northern Rock.

If you don’t mind taking this tiny risk of having to wait for your cash in a worst case scenario then your best option is likely to be investing in a bank or building society and ensuring that you shop around as there are plenty of competitive rates to be found on the market.

Premium bonds may be the exception to this rule - they are a unique product and massively popular. If you want an investment which offers the excitement and the chance of big win with the guarantee of your money back then you might well enjoy holding some bonds. Certainly less risky than frittering your cash away on scratch cards!

Advertisment

Compare the best savings rates, or use our savings calculator.

Bookmark with:

What's this?

Comments