Old friend back from the dead

Just when you thought National Savings had given up the fight, it has launched a television advertising campaign and offered a competitive, tax-free Individual Savings Account (ISA), paying an annual equivalent rate of 5.75 per cent.

The interest rate is variable but it is guaranteed not to fall below base rate for the coming tax year. The accounts are available from 6 April. The maximum investment is pounds 3,000 in the first year and pounds 1,000 annually after that. Those with less to invest can put in as little as pounds 10 at a time, and take money out again without losing their tax-free advantages and there are no fees, charges, penalties or hidden costs.

Savers who want to invest the maximum permitted amount (pounds 7,000 in the coming year, falling to pounds 5,000 a year in subsequent years) in share-based ISAs (the replacement for PEPs) cannot open a mini-ISA from National Savings as well.

But for small savers who only want a cash mini-ISA, the National Savings product will be hard to beat in terms of convenience, security and a competitive return.

The decision to offer a National Savings ISA is a radical move because National Savings did not offer a Tessa, the ISA's immediate predecessor. The account is intended to be the spearhead of a drive to keep National Savings competitive.

But these efforts may be hampered by the fact that the Chancellor has cut the prize money on premium bonds for the third time in five months. Premium Bonds have been by far the biggest single attraction in recent years, raking in a record pounds 2.14bn net last year alone.

The prize money has been reduced from 5 per cent of the funds invested in February to 4.5 per cent in March and will come down again to 4 per cent next month and 3.25 per cent in June. The monthly million-pound prize will not be affected but the total number of prizes will be cut.

In the last few years, the National Savings scheme as a whole has become less competitive. The total inflow of savings has shrunk from pounds 15.8m in 1996-97 to pounds 12.3m now and the net contribution to the Treasury has dwindled from more than pounds 5bn in 1995-96 to barely pounds 1bn in the current year. The target for 1999-2000 has been set at just pounds 100m.

However, the new ISA points to the fact that National Savings has convinced the Chancellor that it is neither practical nor sensible to slow the scheme down, pay uncompetitive rates and expect to fire it back up again whenever the Treasury needs the money.

New rates on fixed-rate certificates, pensioners' bonds and children's bonus bonds have just gone up. The 50th issue of savings certificates, which went on sale last week, is paying 3.5 per cent tax free, which is worth 4.38 per cent gross for basic rate taxpayers. The old 49th issue paid only 3.25 per cent. The new ninth issue of pensioners' bonds is paying 4.65 per cent gross for five years, compared with 4.25 per cent on the eighth issue.

In the Budget, the Chancellor also asked National Savings to develop a new kind of pensioners' bond, one which will offer tax-free savings without tying savings up for five years.

National Savings is also unique in being able to offer investors an-inflation- proofed investment. The current issue pays an average of 1.65 per cent a year tax-free over five years and guarantees to increase the capital and the interest in line with inflation. Unlike index-linked gilt-edged stocks (government bonds, known as gilts) which will shrink in value in times of deflation, the indexed increase in the capital and the interest on index-linked savings certificates cannot be reduced once it has been earned.

n National Savings: details in Post Offices or call 0645 645000.