Best buy rate from NS&I – so where’s the catch?

Savers can now bag a market-leading 6.2 per cent interest rate on up to £1 million with National Savings and Investments after the Government-backed bank surprised savers last week by launching the best deal on the High Street.

NS&I introduced its highest offer in 15 years – in a highly unusual move that has propelled its bonds to the top of best-buy lists. Two NS&I bonds now have the best rates, ahead of all one-year fixed rates offered by banks and building societies.

But is it really the best store for your cash? Wealth & Personal Finance investigates the catches.

How the bonds work

NS&I issued 12-month Guaranteed Growth Bonds paying 6.2 per cent and Guaranteed Income Bonds at 6.03 per cent on all deposits up to a staggering £1 million. The rates are now the highest since the bonds were first launched in 2008 and apply to new bond issues. When the bonds mature, savers will be able to withdraw their cash or reinvest it at the rate available at the time.

Watch out for tax

Unlike with Premium Bonds, income from Guaranteed Growth Bonds and Guaranteed Income Bonds is taxable. This means you may not take home the full amount you earn in interest.

Market-leading: NS&I introduced its highest offer in 15 years – in a highly unusual move that has propelled its bonds to the top of best-buy lists

Basic rate taxpayers can earn £1,000 in savings interest before paying tax. Savers can pay £16,130 into the Guaranteed Growth Bonds before breaching this allowance.

Higher rate taxpayers have an allowance of £500 after which tax is levied. This means they can invest just £8,065 into the bond before they trigger a tax bill at 40 per cent. A higher rate taxpayer who invests the full £1 million would take home just £37,400 of the £62,000 interest they earn over one year.

Time is limited

Savers may have to act fast if they want to secure the bonds. In the past, NS&I market-leading issues have led to chaos as savvy investors rush to snap up the deals.

In 2015, the state-backed bank launched a 65+ Guaranteed Growth Bond, a fixed term investment, for pensioners. However, when the bonds were launched, huge demand caused NS&I’s website to crash and callers faced a helpline logjam. The bonds were only on sale for five months due to the demand.

Anna Bowes, of rate scrutineer Savings Champion says there is a chance that the new bonds get pulled from sale within months if NS&I is swamped with applications. She says: ‘The new bond will be extremely popular and it will have to manage the intake.’

A lower rate could make you richer

The NS&I bonds pay a better rate than all other deals on the High Street but that doesn’t necessarily mean they will make you richer.

You may be better off investing in a more tax-efficient account, such as an Isa. You can invest up to £20,000 each year into these accounts and all earnings are free of tax.

A higher rate taxpayer with £10,000 or more to invest would be better putting their money into the top-paying one-year fixed rate cash Isa than in the NS&I bond. Shawbrook Bank pays 5.78 per cent, yielding £578 on a £10,000 investment. By comparison, the two NS&I bonds would pay £620 in interest but the saver would receive just £572 after tax.

Meanwhile, basic rate taxpayers would be better off investing in an Isa if they have £20,000 or more. Premium Bonds are another tax-free way of savings. However, there is no interest earned on Premium Bonds and no guarantee of a win. The prize fund rate is currently 4.65 per cent.

Your cash is locked away

You cannot access money in the new NS&I bonds until they mature in a year’s time.

If you cannot commit to locking away your money for that long, Lucinda O’Brien of savings tips website money.co.uk, points to Santander’s new instant access account.

Last month, the bank increased the rate on its Easy Access Edge Saver account to 7 per cent – up from 4 per cent – propelling it far and above the best-paying accounts in the market.

Ms O’Brien says: ‘This could work well for those who need to dip in and out of their savings, as withdrawals are unlimited once opened – but remember, you’ll need to open a Santander Edge current account to access it.’

However, the catch is it’s only the first £4,000 on the account that returns the top rate. You can earn £22.60 in interest every month — amounting to £271 over a year.

Savers should also consider a notice savings account, which allows access to your savings as long as you give prior notice before withdrawal, she adds. Currently, Oxbury offers a 90-day notice savings account, which has a 5.45 per cent variable rate.

This post first appeared on Dailymail.co.uk