Hidden blow for struggling savers
Chancellor’s plans to slash National Savings funding mean more top deals may vanish
SUFFERING savers received very little good news in the Budget on Monday.
The Government’s savings arm, National Savings & Investments (NS&I), appeared at first glance to bring some cheer by raising the amount of money it wants to bring in from savers from £6 billion to £9 billion (which could range by £3 billion either side) in the current financial year ending next March.
NS&I raises money for the Government from savers through its ten products, including Premium Bonds, income bonds and Isas. It is limited in how much money it can raise so that it doesn’t unfairly compete with banks.
And while its fundraising target has been increased, don’t expect this to mean that NS&I is poised to launch a host of attractive new accounts.
It brought in £5.6 billion in the first six months of the financial year alone, figures revealed yesterday. This means it can’t afford to attract too much more new business or risks exceeding its target. On top of this, the target is expected to drop back down again to just £6 billion in the next financial year.
And things could get even worse, according to Treasury watchdog the Office of Budget Responsibility’s forecast. It has suggested NS&I’s target in 2021-22 will be just £2 billion.
The OBR forecast could change when the Treasury sets the actual funding target for NS&I each year if, for example, the Government needs to raise more money or respond to changes in the savings market.
NS&I has already announced a string of changes aimed at stemming the amount of cash it attracts from savers. Just last week, it announced plans to cut the returns on its popular inflation-linked savings certificates from next May.
AROUND 507,000 savers, with an average age of 65, hold a total of £19.9 billion in NS&I index-linked accounts. The savings certificates are incredibly popular among savers because it means their cash is protected against rising prices and the interest is automatically tax-free.
They pay inflation plus 0.01 percentage points for two, three or five years. At present the interest rate on these accounts is linked to inflation as measured by the retail price index, which is currently 3.3 pc.
From May 1, 2019, the rate will instead follow the consumer price index, which is almost a third lower at 2.4 pc. It means that savers holding £10,000 in an account will earn £240 instead of £330. And next year this measure of inflation is forecast to fall to 2 pc. It is estimated that the move will rake in a total of £610 million for the Treasury over the next five years.
NS&I’s index-linked accounts were withdrawn from sale in 2010 but existing savers can roll over their cash into new accounts.
In a further move, last month it cut the rate it pays on its Direct Isa from 1 pc to 0.75 pc — just one month after Bank of England hiked base rate by 0.25 percentage points to 0.75 pc.
It means savers earn less on its tax- free cash Isa than in its ordinary Direct Saver, which pays 1 pc. Its cash Isa is already more restrictive than others. NS&I will not let you transfer your money from other providers into its account, even though HM Revenue & Customs rules allow this. It is up to providers whether they offer this or not. Most other banks and building societies now allow customers to take money out and replace it in the same tax year without affecting your cash Isa allowance — but NS&I does not. NS&I has also cut the amount of money you can put into its Guaranteed Growth and Income Bonds, which went back on sale at the end of last year to £10,000 from £1 million. The rates have remained the same — 1.5 pc for one year or 1.95 pc for three years since June, despite a rise in base rate in August. Justin Modray, from independent financial advisers Candid Financial Advice, says: ‘It is bitterly disappointing for savers still struggling with close to historic low interest rates and inflation. NS&I products are popular because your money is 100 pc guaranteed by the Government but the returns for savers are diminishing.’
The Premium Bond prize rate has also been stuck at 1.4 pc since December, but NS&I says it is competitive compared with other easy access savings products.
In a more positive move, aunts, uncles, godparents and even family friends will be able to buy Premiums Bonds for children by next March. NS&I is also cutting the minimum purchase amount from £100 to £25.
It says the lower limit will encourage a regular savings habit, especially for the young. It is the first time in 25 years the minimum has been set so low. It jumped from £10 to £100 in 1993.
Premium Bonds give savers the chance to win tax-free prizes every month ranging from £25 to £1 million. Every £1 bond number has a 24,500 to 1 chance of winning a monthly prize. Around 770,000 children hold £ 1.1 billion in Premium Bonds to date, and ten have been lucky winners of the £1 million monthly jackpot so far.
In other Budget announcements, the annual Isa allowance next tax year, which starts in April, is unchanged at £20,000, while the Junior Isa allowance will rise to £4,368 from its current £4,260. The personal savings allowance remains at £1,000 for basic-rate payers and £500 for higher-rate payers.
A spokesman for NS&I says: ‘Sales have been strong across a number of our products including Premium Bonds. Money has flowed in following the first base rate rise in November last year when we passed on the full 0.25 pc to our savers.’