A BROKEN BOND
For decades Premium Bonds encouraged Britain to save. But as the odds of winning are slashed, are they really worth buying ...
MILLIONS of savers are in dire straits after National Savings and Investments ( NS& I) announced sweeping rate cuts.
The Treasury-backed savings giant is to slash rates on more than a dozen products — including Britain’s most popular savings product Premium Bonds.
Experts say the Government needs to act urgently to reignite the nation’s savings habit, as many will be wondering where to shelter their nest eggs.
Money Mail has been calling for better rates to be paid to savers with our ‘Stop Short-Changing Savers’ campaign.
Former Conservative Party leader Iain Duncan Smith also writes in Money Mail today and calls for the Government to do more to bring relief to starved savers.
NS&I’s latest round of cuts, which start in May, will deprive savers of rewards worth a total of at least £ 234 million. The changes will hit nearly all of NS& I’s 25 million customers — including 21 million Premium Bond holders.
It comes as interest rates offered by High Street banks and building societies have been in freefall for months. NS&I says it has been forced to slash rates on savings accounts and bonds by as much as 0.45 percentage points in response to paltry rewards offered on the High Street, and the por performance of Government bonds.
NS&I is also restricted as to how much money it can raise for Government, and it cannot t offer rates that would undermine e the commercial market. But the latest round of rates cuts are indicative of just how bad it has got for savers.
Experts fear banks and building societies will follow suit and cut their rates even further. Already, hot on the heels of NS&I cuts, Marcus by Goldman Sachs and Saga have announced rate drops.
The Marcus account goes down from 1.35 pc to 1.30 pc from today for new savers, and on March 10 for existing ones. The Saga Easy Access account, where the deposit taker is Goldman Sachs, also falls today to 1.3 pc, including a 0.2 percentage point bonus.
So is there anywhere savers can safely put their money and still enjoy a decent return?
WHAT’S UP FOR THE CHOP?
NS&I will pull 173,718 tax-free prizes out of its monthly Premium Bonds prize draw. This includes one of the six £100,000 prizes and more than 145,000 of the £25 prizes.
Income bond-holders have been particularly badly hit. Some 180,000 savers will see their rate tumble by 39 pc to 0.7 pc from the current 1.15 pc. These bonds offer easy access to your money and are popular with pensioners because they pay interest monthly.
The 0.7 pc rate is at its lowest level since March 2009 when the general level of interest rates stood at 0.5 pc, against 0.75 pc today.
Since then savers have earned as much as 2 pc.
Anna Bowes, director at Savings Champion, says: ‘Pensioners will find this the cut particularly difficult. It will have a damaging effect on the money in their pocket.’
NS&I is also cutting the rate on its Direct Saver account from 1 pc to 0.7 pc; the Investment Account from 0.8 pc to 0.6 pc; Guaranteed Growth Bonds from 1.25 pc to 1.1 pc on a one-year fix when it matures; Guaranteed Income Bonds from 1.2 pc to 1.05 pc on a one-year fix; and a five-year Fixed Interest Savings Certificate from 1.9 pc to 1.6 pc.
WILL PREMIUM BONDS STILL PAY?
AROUND 21 million of us have money invested in Premium Bonds, and receive entry into a prize draw every month instead of guaranteed interest rate rewards.
NS&I is cutting the reward rate from an interest rate equivalent of 1.4 pc to 1.3 pc — the lowest it has been for more than two years.
As a result, the chances of receiving any rewards on your savings is dropping from one in 24,500 to one in 26,000.
There will still be two top prizes of £1 million, but the number of other prizes is being scaled back.
The number of £100 and £50 prizes on offer has halved — from 27,221 to just 13,448 of each.
For a saver with £50,000 invested, the chances of winning at least £25 a year are still 100 pc. But for a saver with £1,000 invested, the odds will fall 4.4 pc to 37 pc.
Sarah Coles, personal finance analyst at investment platform Hargreaves Lansdown, says: ‘Even before the cuts, the most likely outcome for most Premium Bond savers was that they’d win nothing in a typical month.
‘Savers know they won’t get reliable returns, but they still love Premium Bonds because they offer the outside chance of a major tax-free prize. That’s not going to change: they’ll still be making two millionaires a month.’
But she adds: ‘The price you pay for opting for Premium Bonds is that you don’t earn any interest, so the chances are you’ll lose value after inflation.
‘They are unlikely to be the right place for all your savings and you should be sure you’re getting a competitive rate of return on the rest of your money.’
IS PROTECTION WORTH PRICE?
MILLIONS of savers choose to keep their money with NS&I because their cash is 100 pc protected by the Government, whereas ordinary banks can only guarantee £85,000. This total protection has seen savers flock to NS&I in the wake of the financial crisis and the collapse of Northern Rock. But experts say savers may now be considering whether the low rates are a price worth paying. Justin Modray, of Candid Financial Advice, says: ‘ As it continues to slash rates, NS&I is rapidly shifting from hero to zero.’ James Blower, founder of advice site Savings Guru, says: ‘ NS&I is in a difficult position as the Government can raise money more cheaply through gilts. ‘ But current rates are nowhere near the best buys. Cutting rates by up to 40 pc feels savage in these circumstances. ‘With the exception of Premium Bonds, which are still competitive compared with easy-access savings accounts, I would suggest that NS&I savers look elsewhere.’ However, Patrick Connolly, from independent financial adviser Chase de Vere, believes NS&I is still an attractive prospect. He says: ‘This is awful news for savers, but rates are terrible everywhere and are very unlikely to improve any time soon.’
WHERE SHOULD MY SAVINGS GO?
SAVERS have to work hard for a decent return. The UK’s biggest bank, Lloyds, has this month
launched a one-year fixed-rate bond paying 1 pc — but only to those who can afford the minimum deposit of £100,000.
The top-paying easy-access account on the market is currently Virgin Money’s Double Take E-Saver Issue 14, which pays interest at 1.31 pc yearly. The Virgin Money Double Take E-Saver 14 can also pay interest at 1.3 pc monthly.
Those happy to lock their savings up in fixedrate bonds for a year can get 1.65 pc annual interest with Atom bank. Meanwhile, Atom also pays monthly interest at 1.64 pc for a one-year fixed deal.
Your money is covered by the UK Financial Services Compensation Scheme (FSCS) in all the banks and building societies in Money Mail’s best buy tables.
This gives you £85,000 of cover — £170,000 on joint accounts in the event of the provider running into trouble. The FSCS aims to pay out within seven days of any failure.
SO NOW IT’S OVER TO YOU, CHANCELLOR . . .
PRESSURE is mounting on the newly appointed Chancellor, Rishi Sunak, who is due to deliver the Conservative-majority Government’s first Budget next month.
Consumer experts are hoping something will be done to encourage the nation to save more.
Former pensions minister Steve Webb called on the Government to ‘think about how repeated interest-rate cuts undermine its wider message about the importance of saving’.
He says: ‘This latest announcement is another blow to those who are prudent and set something aside for a rainy day.’
Meanwhile, James Daley, of consumer campaign group Fairer Finance, says: ‘It’s been a rough decade for savers and the 2020s don’t look like they’re going to be much better.
‘With Rishi Sunak’s first Budget coming up, I’m sure savers will be keeping their fingers crossed that he’ll be doing something to support them.’
NS&I chief executive Ian Ackerley says: ‘Reducing interest rates is always a difficult decision. We need to ensure our interest rates are set at an appropriate position against those of our competitors.
‘We believe our new rates offer our customers a fair return and the assurance of the 100 per cent HM Treasury guarantee on all their holdings with NS&I.’