Why savings rates aren’t always what they seem
National Savings & Investments has launched two top of the savings league table one-year bonds, but the headline rates might not be your net return.
In August, National Savings & Investments (NS&I) raised the return of many of its offerings, from the Direct ISAs to the Green Savings Bond. However, all eyes have been on the new rates for the one-year Guaranteed Growth Bond (GGB) and Guaranteed Income Bond (GIB).
Both of these one-year bonds now offer a 6.2% annual equivalent rate (6.03% payable monthly on the Guaranteed Income Bond). Their previous rates had been 5.0% and 5.12% AER. The 1%+ increases took both bonds to the top of the one-year league tables, where they remain at the time of writing.
This is unusual; the primary role of NS&I is “cost-effective financing for the government.” To find one of their products sitting in a number one position in any savings league table calls into question the product’s cost effectiveness.
In the current financial year, NS&I has been charged with raising between £4.5 billion and £10.5 billion for the Treasury coffers (a relatively modest sum compared with a projected £237.8 billion of government bond sales). However, NS&I saw net outflows in June and July totalling £0.3 billion according to the Bank of England. The raise in returns was in response to those outflows and the continued upward pressure on interest rates,
What does it mean for me?
6.2% might seem like a good rate – and arguably it is – but you’ll need to factor in tax to fully understand your net return. This is complicated by the personal savings allowance (PSA), which is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and £0 for the newly expanded band of additional rate taxpayers. Crunch the numbers on a £20,000 GGB and the net returns depend on how much unused allowance you have:
|
Tax rate |
With full PSA % |
With no available PSA % |
|
Nil |
6.20 |
6.20 |
|
Basic |
5.96 |
4.96 |
|
Higher |
4.72 |
3.72 |
|
Additional |
N/A |
3.41 |
The crucial lesson here is to ignore the exciting headline number and hone in on the net figure. You could find a cash ISA with a lower headline rate that offers a better net return.
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Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
