Blow for a million NS&I savers

MORE than one million savers are set to be hit by a raft of changes to popular National Savings & Investments (NS&I) accounts.

Its index-linked certificates, Guaranteed Growth Bonds and Guaranteed Income Bonds will become less attractive from May.

Around 507,000 savers with £19.9 billion in index-linked certificates will see returns plummet when they renew their accounts.

These accounts are popular because your 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 is linked to inflation as measured by the retail prices index, which is currently 2.5 pc.

But when savers come to renew their certificates from May 1, their rate will follow the lower consumer prices index, which is 1.9 pc.

It means savers holding £10,000 of certificates will earn £191 interest instead of £251, a 24 pc fall. NS&I’s index-linked accounts were withdrawn from sale in 2010, but existing savers can roll cash into new accounts.

The Government-run savings provider is also tweaking its popular Guaranteed Growth and Guaranteed Income Bonds where 677,000 savers hold £17 billion.

With the current bonds, savers can cash them in early if they unexpectedly need to access their money. But the version going on sale from May no longer allows this.

NS&I says it is moving into line with the market, where more than eight out of ten bonds work this way. The shift also changes when you pay tax on your interest and how you use your personal savings allowance.

When you pay tax on bond interest depends on whether you are allowed to access your money before the official maturity date, says HM Revenue & Customs (HMRC). If you can, you typically pay tax each year when the interest is added to your account. But, if not, tax is not due until the bond matures.

If you save the maximum £10,000 in NS&I’s Three-Year Guaranteed Growth Bond paying 1.95 pc, you will earn £195 interest in the first year, £198 in year two and £203 in the final year — a total of £596.

Currently, you can use your £1,000 personal savings allowance against each annual interest payment. It allows basic-rate taxpayers to earn up to £1,000 in interest a year without a tax bill. Higher-rate payers get £500.

But, with the new bonds where you cannot access your money, the whole £596 will count against just one year’s allowance — the year your bond matures. This means higher-rate taxpayers will immediately face a tax bill.

Basic-rate payers may also have to pay tax if they use up more than £404 of their £1,000 savings allowance elsewhere that year.

Those renewing two- or five-year Growth Bonds, not currently on sale to new savers, will also be hit.