Nearly 200,000 savers will see top fixed-rate savings accounts opened last summer mature in the coming weeks.
National Savings & Investments launched new issues of its one-year Growth and Income Bonds – collectively known as British Savings Bonds – on July 30, 2024, with a rate of 5.15 per cent.
These were on offer exclusively to existing customers who opted for its best-ever one-year fixed rate bond paying 6.2 per cent in July 2023 which 225,000 savers opened, stuffing in £10 billion in a stampede for the rate.
Around 80 per cent of savers who had the 6.2 per cent one-year fix matured into the version paying 5.15 per cent, meaning around 180,000 savers will face a decision on what to do with their savings next.
James Blower, founder of website The Savings Guru, says: ‘Those who saved via these bonds are in for a disappointment when they come to reinvest the money this time.
‘The heady days of 5 and 6 per cent fixed rates are now long gone and even getting 4 per cent or more may become a challenge if the base rate falls as expected.’
SO SHOULD YOU NOW STICK WITH NS&I?
This July, NS&I launched new one-year fixed-rate bonds for those wanting to lock their money away.
But this could not match the highs of the issues offering 6.2 per cent and 5.15 per cent.
The latest NS&I one-year Growth and Income bonds pay 4.18 per cent, so it’s worth seeking more rewarding deals.
On a balance of £10,000, the new deal earns you £418, compared to £453 over the year if you choose a top-paying one-year fix.
Cashing in: Nearly 200,000 savers will see top fixed-rate savings accounts opened last summer mature in the coming weeks
Savers can get 4.42 per cent with Atom Bank and 4.35 per cent with Ford Money.
With £50,000 kept in NS&I’s one-year bonds at 5.15 per cent it would have generated £2,575 in interest over the past 12 months.
With the Atom Bank best buy at 4.42 per cent this drops to £2,210 and with the new NS&I one-year bond it is £2,090.
Andrew Hagger, of Money Comms, says: ‘It’s worth shopping around.’ But those with large sums may wish to have the security of NS&I’s Treasury-backed guarantee.
You can save £1 million in Guaranteed Growth and Income bonds, protected by the Government.
Under the Financial Services Compensation Scheme, other banks and building societies offer £85,000 maximum cover.
Adam French, of rates scrutineer Moneyfactscompare, says: ‘For savers who prefer the security of NS&I, its new one-year bond paying 4.18 per cent offers a reasonable rate of return.
‘While it doesn’t top the best buy charts, it still outpaces current inflation forecasts.’
WHAT IS NEXT THEN FOR FIXED RATES?
For those able to lock some of their cash up for longer, it makes sense to do so as interest rates are expected to continue to fall.
The top five-year bond is paying only marginally less than the top one-year bond, at 4.51 per cent, with Birmingham Bank.
‘This is the highest five-year rate we’ve seen for months,’ says Anna Bowes, co-founder of Savings Champion.
‘If rates fall as predicted you might be glad a year from now that you locked in today’s higher rates for the long term.’
The top one-year rate is 4.42 per cent with Atom followed by 4.4 per cent from Habib Zurich. ‘Neither of these are likely to be around by the end of August,’ says Mr Blower.
‘I expect the best buy market for one-year will settle around 4.3 to 4.35 per cent, so a significant drop. It’s unlikely to improve from there either so I would not recommend waiting for better rates.
‘With the base rate expected to fall again to 3.75 per cent, at the end of the year, and to 3.5 per cent in 2026, rates are likely to drop further from here.’
WHAT ABOUT LOOKING AT OTHER ACCOUNTS?
Higher savings rates in recent years has resulted in more savers falling into the tax net.
The Personal Savings Allowance (PSA) has been frozen for nearly a decade.
This is the amount of interest you can earn before tax, which depends on your income tax band.
Basic-rate taxpayers can earn £1,000 in interest tax-free.
Higher-rate taxpayers can earn £500 while additional-rate taxpayers have no allowance at all. That’s why cash Isas have seen a surge of popularity in recent months.
The taxman is clawing back earnings on a record number of savers, with another 120,000 dragged into the net over the past year.
Some 2.64 million will be stung by income tax on the interest they earn in their savings accounts in 2025-’26, says HMRC, nearly two million more than four years ago.
Unlike prizes won on Premium Bonds, interest earned on savings kept in NS&I’s British Savings Bonds are not tax-free.
If you fear breaching your allowance, a cash Isa is the best home for up to £20,000 of your balance a year.
Currently top fixed-rate Isa deals are a one-year fix paying 4.31 per cent from Vida Savings. Shawbrook Bank has a two-year fix paying 4.21 per cent and a three-year fix with a rate of 4.25 per cent.
Mr French says: ‘Many of the top one and three-year plus fixed cash Isas are paying better than the NS&I bond. These come with the perk of a tax-free wrapper.
If you have more to save than the £20,000 Isa allowance, a mix of Isas and savings accounts is a good idea.’