National Savings and Investments

Hazel Cottrell
hazel.cottrell@consumerchoices.co.uk

National Savings and 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.

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 different products available and investigate whether this really is the best place for your money.

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What are National Savings and Investments?

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

To encourage ordinary wage earners to save for the future and to help them build up their savings securely.
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 and Investments website (www.nsandi.com)

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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.

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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.

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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.

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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.

The following table provides a brief overview of the products available:


Product	Tax Free?	Investment	Current Interest Rate (AER)
Direct ISA		£1,000 - £3,600	5.30%
Cash ISA		£10 - £3,600	4.60%
Easy Access Savings Account		£100 - £2 million	1.85 - 4.40%
Investment Account		£20 - £1 million	3.20 - 4.10%
Fixed Interest Savings Certificates		£15,000	3.50%
Index-Linked Savings Certificates		£15,000	RPI + 1.00%
Premium Bonds		£100 - £30,000	Monthly Cash Prizes
Children’s Bonus Bonds		£25 - £3,000	4.45% (Based on 5 year term)
Income Bonds		£500 - £1 million	4.45 – 4.70%
Guaranteed Income Bonds		£500 - £1 million	4.65%
Guaranteed Growth Bonds		£500 - £1 million	4.75%
Guaranteed Equity Bonds		£1,000 - £1 million	Linked to FTSE

The following sections expand on the table and give a brief summary of each product.

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ISAs

NS&I offer two types of ISA, the Direct ISA and the Cash ISA. Both are open to UK residents aged 16 or over, allowing you to save up to £3,600 each tax year and receive tax-free interest.

The Direct ISA offers a higher interest rate of 5.30% but you must open it with a deposit of £1,000 and are restricted to paying in further deposits of a minimum of £250 or £100 (standing order). You can only transfer funds into the account by direct debit or standing order and you must manage the account online or by telephone.
The Cash ISA offers a slightly lower interest rate of 4.60% but you can open the account with just £10 and the account is more flexible and easier to access. You can manage your account online, by phone or in the Post Office. You can pay money into the account by direct debit, standing order, cheque or cash at a Post Office or cheque by post.

Compare ISAs >>>

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Savings Accounts

NS&I offers two types of Savings Accounts, the Easy Access Savings Account and the Investment Account. The interest paid on both is taxable.

The Easy Access Savings Account can be opened with a deposit of £100 which must be kept in the account and subsequent deposits must be a minimum of £10. The interest rates are tiered and offer between 1.85% (on balances less than £100) and 4.40% (on balances of £50,000 or more). It comes with a cash card that allows you to withdraw up to £300 per day from any Post Office branch or any ATM that displays the LINK logo.
The Investment Account can be opened with a deposit of £20 and also offers tiered interest rates which start from 3.20% on balances under £500. Instead of a cash card you will use a passbook to keep track of your savings and although you can withdraw money at any time, it may take a few days to process your request.

Compare Saving Accounts>>>

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Savings Certificates

These are tax-free investments that can be bought by anyone aged seven or over - or on behalf of a younger child. NS&I release new issues of these certificates several times a year and investors are allowed to put up to £15,000 in each issue (this is on top of your ISA allowance).

Fixed Interest Savings Certificates offer a guaranteed tax-free return at fixed interest rates, currently 3.5%. They are available in two or five year terms and whilst you can cash them in early, you will get the maximum benefit if you leave your money invested for the full term.
Index-linked Savings Certificates – these are said to be ‘inflation-beating’, as the interest you receive is linked to inflation rates. You will receive interest at a rate matched to the Retail Prices Index as well as a bonus 1.00%. These certificates are currently available in terms of three or five years and to benefit you must leave your money invested for at least a year.

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Bonds

Premium Bonds are the most popular of the bonds offered by NS&I, but they do provide a variety of other bonds which involve varying levels of risks and returns.

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 £50 to two jackpot prizes of £1 million. 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 22,000 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.
Children's Bonus Bonds allow you to invest for your child’s future tax-free and in their own name. Anyone over 16 can invest in them for children under 16 but the bond will be sent to the child’s parent or guardian, regardless of who bought it. You can invest from £25 to £3,000 per issue per child and will receive a fixed interest rate for a 5 year term as well as a guaranteed bonus at the end of the 5 years. The current compound interest rate over 5 years including the 5th anniversary bonus is 4.45%. (See our guide to Child Trust Funds for another way to save for your brood).
Income Bonds allow you to receive regular monthly income from your savings at variable rates. You can invest between £500 and £1 million and the interest you earn on these savings will be paid monthly, directly into your nominated account. You can cash your bonds in at any time with no notice and no penalty. The interest is paid gross, currently at 4.45% - 4.70%, but is taxable so must be declared to the Inland Revenue.
Guaranteed Income Bonds allow you to receive regular monthly income from your savings at fixed rates so you know exactly what return you will get on your investment. You can invest between £500 and £1 million and the interest you earn on these savings will be paid monthly, directly into your nominated account. You can choose between terms of one, three and five years. The interest is paid gross, currently at 4.65%, but is taxable so must be declared to the Inland Revenue.
Guaranteed Growth Bonds are lump sum investments that earn fixed rates of investment over a set period of time. You can invest between £500 and £1 million and can choose between terms of one, three and five years. The interest, currently at 4.75% will be added to your bond annually. You can have access to your investment before the end of the agreed term, but will be charged a penalty equal to 90 days worth of interest on the amount you cash in.
Guaranteed Equity Bonds offer growth potential linked to FTSE 100 index up to 75% with no risk to your capital – if the FTSE falls you are guaranteed to get your investment back in full. These bonds are open to anyone aged 18 or over and you can invest from £1,000 to £1 million in them. The investment term is five years during which you can make no withdrawals and the returns are liable to UK Income Tax when the bonds mature.

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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 I must stress 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 £35,000 (recent proposals have suggested an increase 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 £35,000 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 £35,000 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 I would definitely advise you to invest in a bank or building society and ensure 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!

Compare the best savings rates, or use our Savings Calculator.

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