National Savings and Investments (NS&I) has launched a highly attractive offer with a market-leading interest rate of 6.2% on deposits up to £1 million. This move has surprised savers and propelled NS&I’s bonds to the top of best-buy lists. However, it’s important to explore the catches before deciding if it’s the right option for your savings.
NS&I’s bonds are issued as 12-month Guaranteed Growth Bonds, paying 6.2%, and Guaranteed Income Bonds, offering 6.03%. These rates are the highest since the bonds were first introduced in 2008. When the bonds mature, savers have the option to withdraw their cash or reinvest it at the prevailing rate.
One thing to consider is that unlike Premium Bonds, the income from NS&I’s bonds is taxable. This means that savers may not receive the full amount they earn in interest. Basic rate taxpayers can earn £1,000 in savings interest before paying tax, while higher rate taxpayers have an allowance of £500 before tax is levied.
Another factor to keep in mind is that time is limited to secure these bonds. In the past, NS&I’s market-leading offers have resulted in high demand and caused chaos. For example, when the bank launched a 65+ Guaranteed Growth Bond in 2015, the overwhelming demand led to website crashes and helpline logjams. The bonds were only available for five months due to the overwhelming response. It’s possible that the new bonds could be pulled from sale within months if NS&I is inundated with applications.
While NS&I’s bonds offer better rates than other options on the High Street, it doesn’t necessarily mean they will make you richer. It may be more advantageous to invest in a tax-efficient account like an ISA, where you can invest up to £20,000 annually, and all earnings are tax-free.
For higher rate taxpayers with £10,000 or more to invest, a top-paying one-year fixed rate cash ISA might be a better option. Shawbrook Bank, for example, offers a rate of 5.78%, yielding £578 on a £10,000 investment. In comparison, the two NS&I bonds would pay £620 in interest, but after tax, the saver would receive just £572.
It’s crucial to note that your money will be locked away in the new NS&I bonds for a year. If you need more flexibility, Santander’s Instant Access Edge Saver account, with a 7% interest rate, might be a better fit. However, only the first £4,000 in the account will earn the top rate. Savers should also consider notice savings accounts, where withdrawals require prior notice. Oxbury, for example, offers a 90-day notice savings account with a variable rate of 5.45%.
In conclusion, while NS&I’s bonds offer an attractive interest rate, there are various factors to consider before committing your savings. It’s essential to weigh the tax implications, time limitations, and available alternatives to make an informed decision.
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