Cash savers putting money with National Savings & Investments may be helping to join the national fight against Covid-19.
With more than 25 million customers nationally, NS&I — which is backed by HM Treasury — is one of Britain’s most popular financial institutions when it comes to cash savings products and, therefore helps fund the government’s financial fight against Covid-19 and the resulting economic downturn.
In February, NS&I announced a series of reductions across its range. For example, the Premium Bonds prize fund rate was originally set to be reduced by 10 basis points, from 1.4 per cent to 1.3 per cent, while the variable rate savings products had reductions of between 20 and 45 basis points, effective from May 1.
But when Covid-19 struck our shores, and the second Bank of England base rate cut was announced, taking it down to a record low of 0.1 per cent, Anna Bowes, co-founder of SavingsChampion, wondered whether NS&I could be “mobilised to help the government raise money to support both the economy and help beleaguered savers”.
Within a couple of weeks, NS&I announced it was no longer going ahead with the variable interest rate reductions it had announced at the beginning of the year. Instead, any saver in its premium bonds, direct saver, income bonds and investment account product will find the rates of interest remain at their current rates.
At the time, a spokesperson from NS&I stated this measure was “to support savers at this difficult time”. But with many other banks and building societies sending letters to millions of Britons informing them their Isas and other cash savings products will see rates cut, NS&I's guarantee may well encourage more cash to come its way.
That said, customers holding Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates and whose investments mature on or before June 1 2020 and who automatically renew into a new issue of the same term, will receive the previous, higher interest rate.
However, any customers who choose to renew into a new issue with a term of a different length will receive a reduced interest rate as of May 1 2020, varying between 15 to 40 basis points, depending on the type and duration of the bond.
Ms Bowes called the scrapping of the planned reductions as “great news, and something we hoped to see”.
Emotive language
Advisers may prefer their clients to invest for the long term, and would be quick to point out that current rates will not produce a real return after inflation. But given some economists predict the prolonged Covid-19 global lockdown will push most economies into a slump not seen since the Great Depression of 1929, it is understandable that savers may be tempted to put their cash with NS&I.
After all, it comes with a government guarantee underpinning it, and with markets so volatile and many listed companies teetering, the language of safety, security and ‘funding the war against Covid-19 effort’ surrounding NS&I is undoubtedly attractive.
Ms Bowes highlighted the historic context behind the language equating NS&I with ‘war bonds’.
She said: “During the first world war, an increased need for the government to borrow money saw the launch of War Savings Certificates in 1916 and National War Bonds in 1917. The former cost 15s and 6d each and became worth £1 within five years. The latter paid 5 per cent interest.
“The amount raised during the first world war was almost £433m [around £30bn based on 2019 values].”
Similarly, the Savings Bank ran a nationwide campaign to help fund the second world war, including a new issue of National Savings Certificates and the introduction of new Defence Bonds. According to Ms Bowes, deposits into National Savings rose from £509m to £1.98bn between 1939 and 1946.
Dennis Hall, chief executive of Yellowtail Financial Planning, said: “I’m not yet seeing NS&I as the new war bond, though interestingly the term war bond (but obviously called something else) has cropped up as something the government may want to issue to find a long-term way of managing this debt.
“At these interest rates, issuing long-term debt and then praying for inflation will help solve the government’s debt problem.”
A spokesman for NS&I did not comment on the Treasury’s financing needs or the Covid-19 response, but stated: “We review the rates on all of our products regularly and recommend changes to HM Treasury when we believe they are appropriate, to ensure we continue to balance the interests of our savers, taxpayers and the stability of the broader financial services sector.”
But that question of stability is what investors want now, as Rachel Springall, finance specialist for Moneyfacts, commented: “Savers may feel they have nowhere to turn to right now, so NS&I as a government-backed brand could be a trusted safe haven to invest their cash.
“NS&I’s U-turn [on] savings rates was a positive move to support savers during the coronavirus pandemic, but fundamentally raising more deposits could aid the economic crisis by providing more spending money to the government.”
Employing similar language to those echoing the War Bonds of the 20th century, Ms Springall added: “During both the first and second world war, the National Savings Movement was seen as instrumental for raising funds to help the war effort. Now as the country is at war with the coronavirus pandemic, the funds NS&I could raise from savers may prove a vital injection.”
Cash is the new king?
Aside from any sense of altruism — and very few people will be putting money into NS&I just because it can help the government meet its fiscal pledges — Ms Bowes said that, in the case of NS&I, cancelling the scheduled cuts to the variable rate on-sale accounts was a “step in the right direction” to give savers some certainty.
She said: “Although not offering the best rates on the market, these accounts are competitive, especially for those with amounts of more than the Financial Services Compensation Scheme limit of £85,000. The biggest draw of NS&I is the fact that all deposits with the provider are guaranteed by HM Treasury.”
Similarly, Mr Hall said he has a couple of clients who have received large sums this year holding money in NS&I, “not for the rate, but for safety”, he said, adding: “To be fair, the clients have been involved in risk management in their banking careers".
The point on cash rates is a solid one to consider. Ms Bowes said better easy access accounts could still be found, so it is important advisers and their clients shop around for the best rates. Ms Bowes also emphasised the FSCS protection with other providers will also be limited to £85,000 per banking licence.
But the biggest impediment to a rush of savings remains the fact that available rates are still very low by historic standards. Alan Steel, chairman of Alan Steel Asset Management, said: “It seems to me that holding cash deposits makes little sense.
“It [perhaps] did back in the days that building society accounts paid out double figures gross a year. But when you removed income tax and inflation, there was hardly a year in the last 50 that savers, particularly higher-rate taxpayers, made any positive real return.”
But Mr Steel also noted the safety and security that come from having a cash buffer. He commented: “I’ve always thought of cash like a harbour. When it gets stormy you shelter in the harbour. And when the storm blows over you get back into the sea.
“Personally, I like to keep a decent ‘float’ irrespective of the interest rate. At times like this it gives you peace of mind, and allows you to drip into equity fund bargains.”
Alternatives
The average high street bank offers just 0.01 per cent on saving accounts, compared with the relatively attractive 1 per cent on NS&I’s Direct Saver account.
There are other options. Both Ms Springall and Ms Bowes encourage shopping around when it comes to cash. Ms Springall said “it is vital that savers compare deals”.
“If savers are chasing interest, the top deals remain those on offer from challenger banks.” As the table shows, even the top rates are no guarantees, with interest rates falling across the savings market. By sticking with cash, savers are exposing themselves to pound-cost ravaging and the eroding power of inflation.
What should investors be doing with their money, then, instead of buying 2020’s version of war bonds?
Rather than piling into cash, Mr Steel would prefer to use a fund such as a “Ruffer or Trojan”. He explained: “Their jobs are like a goalkeeper’s. To keep clean sheets when under attack. If you look look at their performance over the past three months through to the past five years, compared with the main UK indices, it shows pessimists have a role to play as defenders.”
Both the Ruffer investment trust and the Troy Asset Management's Trojan fund invest more than a third of their assets in global fixed interest.
The latter simply seeks to beat inflation over the long term while the former seeks to achieve double the base rate of interest.
And as Adrian Lowcock, head of personal investing at Willis Owen, said, taking time out of the market and sitting in cash is an “additional risk” that many investors may not want to take.
He would rather people remain invested or even, under advisement, put money into good long-term, diversified equity funds.
Mr Lowcock added: “With the coronavirus crisis in only the first phase, and with current figures reflecting a mirage caused by the lockdown, taking time out of the market now is an additional risk for investors to take.
“We are at the end of the beginning, not the beginning of the end. Life after lockdown will bring some psychological relief, but when professional investors start focusing on fundamentals and more data comes through, it will be some time until the situation returns to anything like normality.”
Until then, a flight to safety may well see more money withdrawn from risk assets despite these warnings, and into the coffers to fund the battle against Covid-19.
simoney.kyriakou@ft.com
