NS&I savings bond flaws under the spotlight

Savings experts warned rising inflation expectations mean it is unlikely the cash locked into the savings bond announced as part of the Autumn Statement today (23 November) will scoop up any kind of growth.

Chancellor Philip Hammond announced that a savings bond will be available through the government provider, National Savings & Investment (NS&I), with a 2.2 per cent return.

Yet the industry has been quick to point out the flaws of the product. 

Danny Cox, chartered financial planner at Hargreaves Lansdown, said the new bond is a “decent gesture” from the government, pointing to the popularity of NS&I’s pensioner bonds, which proved how desperate savers are from a better return on their cash. 

However, with consumer price inflation expected to soar as high as 5 per cent in the next 12 months, Mr Cox said it is unlikely savings in this new bond will “do anything but go backwards”.

Giovanni Daprà, chief executive of digital wealth manager MoneyFarm, said the new savings bond serves as a reminder that interest rates are low so Brits need to consider an alternative to cash savings.

He warned the bond means savers will tie up their money for three years, adding: “Some expectations suggest inflation may shoot above the 2 per cent target during that time frame, in which case locking money into this bond may hinder wealth growth.”

This was echoed by Calum Bennie, savings expert at Scottish Friendly, who said, while the bond is “better than nothing” it is “unlikely to set the heather alight” at a time of increasing inflation.

“This was not a Budget for savers,” he said, adding savers are continuing to get very low returns even with the proposed bond. 

“Those looking for a home for their money over the long term should continue to consider the growth potential of investing in stocks and shares Isas."

It is little more than a token gesture from Hammond trying to paper over the cracks.Andrew Hagger

Mike Gordon, technical director at financial planning firm Rutherford Wilkinson, pointed to the bond’s maximum investment of £3,000, which he said is “hardly rewarding” for investors, with only £66 a year able to be earned in interest. 

“While the chancellor said two million people are due to benefit, we must remember the NS&I website crashing due to demand with pensioner bonds and so we shouldn’t hold our breath on these."

Wendy Cochran, independent financial adviser at Dalbeath Financial Planning, agreed the maximum investment of £3,000 will not help that many people in a significant way. 

“One of the attractions of NS&I is that you can safely exceed the FSCS limit, which is shortly to go back up to £85,000.

“Our typical client who struggles to find a good home for cash deposits is our older, perhaps recently retired cash-rich cautious client. They often have large sums in cash (often from pension tax free cash), so a £3,000 limit is of little help as it only yields £66 per year.

But Ms Cochran questioned whether smaller savers will want to lock their money away for three years, and therefore said the product will need to be flexible.

Stuart Anderson, head of marketing and communications at Clarion Wealth Planning, said he can’t see this being a product of much interest for his clients because Clarion has a minimum requirement of £1m in investable assets.

“For those who are interested the rate looks pretty good today and is better than anything else on the market, but we don’t know what might happen with inflation and interest rates during its lifetime, so it might not really be terribly generous.”

Marlene Outrim, managing director of Uniq Family Wealth, said anything that provides savers with a better interest rate than they are getting now "has got to be a good thing".

However, she said it is not yet clear how long the bonds will need to be held in order to obtain the better rate.

Dan Eilkington, IFA at Chattertons Solicitors, said the new bond will probably in high demand from a certain segment of savers.

But he said it was important to remember that the NS&I is not there to become the savings provider of choice, and must make sure that it doesn’t stifle competition.

Andrew Hagger, independent analyst of Moneycomms, said on the face of it the new product may seem like some much needed good news for beleaguered UK savers.

But he argued the rate is “hardly going to get savers rejoicing from the rooftops”, particularly as they will have to lock their cash away for three years.

“It's too little too late for UK savers who've suffered for too long at the expense of a government policy,” Mr Hagger said, adding: “It's little more than a token gesture from Mr Hammond trying to paper over the cracks.”

katherine.denham@ft.com