NS&I offers more choice and higher rates with its British Savings Bonds

Even with the increased interest rates, how competitive are British Savings Bonds?

National Savings and Investments (NS&I) launched new issues of its one- and five-year British Savings Bonds today (15 April), which now sit alongside its two- and three-year accounts.

This is the first time NS&I has offered these four different terms at the same time since 16 February 2010.

As well as introducing one- and five-year British Savings Bonds, NS&I also increased the rates on its existing two- and three-year bonds. The two-year bonds now pay 4.00% AER, up from 3.60% AER, while its three-year options pay 4.10% AER, up from 3.50% AER (Guaranteed Growth Bond) and 3.49% AER (Guaranteed Income Bonds).

Meanwhile, the one-year bonds pay 4.05% AER, and the five-year bonds pay a slightly higher 4.06% AER. These interest rates are fixed for the specified term, meaning you can get a guaranteed return on your money.

"Today’s changes will help us to meet our new Net Financing target while continuing to balance the interests of savers, taxpayers and the broader financial services sector,” noted Andrew Westhead, Retail Director at NS&I.

“Savers who prefer to have their cash invested with NS&I may be pleased to see a range of choice in the terms offered for a fixed return. NS&I is a trusted brand so, even if there are better returns available elsewhere, they can still prove popular with savers,” commented Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.

Are British Savings Bonds a good deal?

One of the major attractions of NS&I’s British Savings Bonds is the fact they are backed by the Government.

Savers can deposit between £500 and £1 million in each issue of a British Savings Bond, with the reassurance that 100% of their deposits will be protected should something go wrong.

This security can make these accounts particularly popular with those who have large sums to put into savings, as they don’t need to worry about dividing their money between different providers to ensure it qualifies for protection under the Financial Services Compensation Scheme (FSCS).

However, even though British Savings Bonds are appealing, it’s worth bearing in mind that you can’t access your money for the length of the term and it’s possible to find significantly higher rates elsewhere.

For example, as of 15 April, the market-leading one-year bond stands at 4.68% AER while the top two-year bond pays 4.58% AER, compared to the 4.05% AER and 4.00% AER offered by one- and two-year British Savings Bonds respectively.

This means that, if savers had £20,000 to deposit in a one-year bond, they could earn around £936 by putting it in the market-leading account, £126 more than if they deposited it in a Guaranteed Growth British Savings Bond.

Furthermore, savers could earn approximately £241.95 more in interest by depositing £20,000 in the highest-paying two-year bond instead of a Guaranteed Growth British Savings Bond at 4.00% AER.

“The interest rates offered on fixed rate bonds have come down in recent months, so any saver who wants to grab a deal to get a guaranteed return on their hard-earned cash may want to move quickly. There are many challenger banks offering the top rates, and the fixed bonds that hit their deposit targets can face cuts or be withdrawn,” Springall explained.

Even though these savings accounts aren’t backed by the Government, unlike British Savings Bonds, your deposits are still protected under the FSCS.

This means that, if a provider goes bust, savers will get back the money they’ve deposited, up to a maximum of £85,000. However, this limit applies to each individual banking licence, so it’s worth checking if multiple providers operate under the same licence. See our guide on who owns whom for more information.

The tax risk

As with standard savings accounts, you may need to pay tax on the interest you earn on British Savings Bonds.

Basic- and higher-rate taxpayers can earn up to £1,000 and £500 respectively in interest per year on their savings without paying tax, thanks to the Personal Savings Allowance (PSA). Additional-rate taxpayers don’t qualify for any allowance and will be liable to pay tax on all their savings interest.

With savings rates at their current level, it doesn’t take much to use up your PSA. For example, you only need to deposit £25,000 in a one-year bond paying 4.05% AER to earn more than £1,000 in interest.

As a result, it’s important to calculate how much interest you could earn so you can organise your savings to avoid any unexpected tax bills later on.

Anyone at risk of being taxed on their savings may want to consider an ISA, as these specialist accounts allow you to deposit up to £20,000 a year without paying tax on any interest earned.