Why NS&I is trying to break up with you

UK consumers have stashed more than £100bn in savings since February’s calm before the storm, according to the latest government figures, with another £12.3bn squirrelled away, mostly into easy access accounts, in September.  

At the same time we’re still stamping out our debts the Bank of England revealed this week, with credit card pay-offs driving the latest chunk of a £15.6bn repayment trend that started, unsurprisingly, in March.

In other words there’s now a great deal of cash sloshing about the system. But record low interest rates and an embarrassment of riches are not making life easy for those who have had the luck and opportunity this year to keep the money coming in while less is going out – building up some real rainy day funds in the process.  

“The rotten irony is this bumper flow of cash is going into deposit accounts just when interest rates sit at record lows,” says Laith Khalaf, an analyst for AJ Bell.  

“In such uncertain times it makes sense for savers to build up an emergency cash buffer, though the risk is that inflation eats away at the value of their nest egg. Instant access accounts are now paying just 0.12 per cent interest on average, below CPI inflation, which currently sits at 0.7 per cent, and is expected to rise throughout next year.”

But when it comes to National Savings and Investments (NS&I) the money is already going out – by £500m over the course of the last month as rate drops were announced across its product range.

In simple terms, NS&I’s role is to source spending cash for the Treasury, rewarding consumers who offer up their cash with a return on their money via a range of financial products.  

The Treasury increased the target funding from £6bn to £35bn in July as the pandemic hit. But NS&I has already pulled in £38.3bn since the start of the financial year, with months still to go including ISA season. Though the funding target may increase further, for now NS&I doesn’t need to entice customers with expensive interest rates any longer.  

From the end of November, rates on products including the Direct Saver, Investment Account, Direct ISA and Junior ISA  dropped significantly, as did returns on the provider’s Income Bonds and even Premium Bonds. Some accounts are now paying virtual nil.  

“In the first six months of 2020-21, NS&I has delivered a total of £38.3bn of net financing for the government. In Q2 2020-21, net financing was £23.8bn and in Q1 2020-21, net financing was £14.5bn,” a spokesperson for NS&I said.

“On 21 September 2020, NS&I announced interest rate reductions, effective as of 24 November 2020, that apply to NS&I’s variable rate products and some fixed term products. These interest rate reductions will help NS&I manage its Net Financing and see NS&I return to a more normal position for its products against the interest rates offered by the banks and building societies.  

These changes will also deliver better value for the taxpayer by improving the cost-effectiveness of the financing that NS&I raises for the Government, in line with its operating framework to balance the interests of savers, taxpayers and the broader financial services sector.”

The problem for savers is not only one of shifting their cash away from NS&I. More than half of its ultra-loyal customer base is expected to keep their money where it is, despite the cuts. That is likely to include those who prefer such Treasury-backed security – regardless of the £85,000 FSCS protection elsewhere.  

Others too may choose to stick if they have used up their personal savings allowance, at which point the interest paid by these products is worth more than a standard account due to the tax break.

The wider issue is that the rest of the market is set to follow the downward rate trajectory, just as the money pours in from the 43 per cent of NS&I’s massive customer base that will switch.  

“The cuts are likely to have a ripple effect on savings rates across the market, as banks and building societies won’t have to offer quite as much interest to compete with NS&I,” says Khalaf. “When a big player like NS&I cuts rates so drastically it can therefore be expected to affect savers across the board.”

“The easy access market has been inundated,” says Sarah Coles, personal finance analyst for Hargreaves Lansdown.  “Providers have cut rates again, [to] just a quarter of February’s average rate.

“Fixed rates haven’t been overwhelmed, and thanks to competition from newer banks, rates actually rose in October. However, this is not the beginning of the end for the cuts. We expect even more over the coming months, so now is the time to act,” she warns, adding that people typically need between three and six months’ worth of expenses in an easy access savings account as an emergency savings safety net.

“At the moment you can earn 0.7 per cent on this money with Al Rayan bank – the highest rate with no restrictions. After that you can consider tying up the rest of your cash for the periods that suits you best.  

“Right now you can get 0.85 per cent over a year or 1 per cent over two years. These rates are slightly higher, but they’re also locked in for the fixed period – regardless of what happens to rates in the wider market.”

“For money that can be tucked away for even longer, a minimum of 5 to 10 years, an investment in the stock market is worth considering," adds Khalaf. 

“The current yield on the FTSE 100 is 3.4 per cent, and with the potential for capital growth that looks like a more attractive option than cash for long term investors.”