Savers across the UK have been scrambling to get hold of a brand new deal that effectively offers returns of 9.7% to higher-rate taxpayers and 7.25% to basic rate ones.
The new offering, from government-backed National Savings & Investments (NS&I), promises to beat the rate of inflation for the next five years and doesn’t incur tax.
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The new deal
NS&I is now offering savers the chance to earn tax-free interest that is set at 0.5 percentage points above inflation for the next five years. That works out at returns of 5.8% at the moment.
As normal savings accounts tax any interest you receive at the same rate as you pay income tax, you would need to find a bank or building society paying at least 7.25% if you are a basic-rate taxpayer or 9.7% if you are a higher-rate taxpayer to beat this.
Demand for a similar NS&I inflation-beating account was so high that the savings provider was forced to pull it from the market ten months ago.
The NS&I account lets you save between £100 and £15,000. At the end of the five-year deal you can continue the investment if you want.
Another benefit of the deal is that with NS&I your money is as safe as it could be, the investment organisation is fully backed by the government.
Is there a catch?
There are no catches, as such, to this account. But it won’t be for everyone.
Firstly, it pays no regular income — you only get the interest when you cash the deal in. Secondly, you need to invest for the full five years to get the full benefit (although some interest is paid if you wait more than a year to cash in).
Most importantly, the rate can fall as well as rise. Inflation is predicted to fall in the years to come — although to rise even higher in the next few months — and while the account will pay out 0.5 percentage points above inflation for five years, there is no guarantee this will be market-leading in years to come.
NS&I looks at what inflation is two months before you invest, then updates the rate annually each year — if inflation is lower next year the rate will fall, but similarly, if inflation rises, so will your interest rate.
What else is out there?
While the NS&I deal is one of the best out there, there are other options that can prove lucrative.
HSBC is offering people 8% interest on its regular saver product. If you’ve got some spare cash to put away each month (between £25 and £250) it’s a great deal. The interest is also paid after one year, rather than having to wait five, so even though tax is charged it will beat the return on the NS&I account for all but higher-rate taxpayers. To get the full benefit, however, you need to wait 12 months to access your savings.
If you need access to your money quickly, the best deal is the Nationwide e-ISA, currently paying 3.1% tax-free. If you’re happy to lock your money away for longer, Northern Rock is paying 4.25% tax-free on its Fixed Rate e-ISA Issue 9. This is a three-year account and — depending on inflation — could even pay out more in total than the NS&I deal overall.
If you’ve already used up your ISA allowance for the year, the best fixed-term account for five years is Birmingham Midshires’ 5 Year Internet Fixed Rate Bond, paying 5.05%.
Those looking for a regular monthly income get the best fixed rates from Santander’s Three Year Fixed Rate Savings Bond (at 4.01%) although the money must be invested for the full period to get that rate.
Those who think they might need their cash sooner but want a regular income can get 3.05% from Nationwide’s MySave Online Plus account. However, the Nationwide deal includes a bonus, with the rate set to drop after the first 12 months.
By James Andrews