National Savings & Investments, the deposit institution backed by HM Treasury, has announced that it is cutting the interest rates on some of its more popular products. 

NS&I attempted to reduce interest rates earlier in the year. The media and consumer groups were very vocal in criticising the proposed reduction and this persuaded the Treasury to delay the rate rise for a while. 

NS&I has now announced that it will go ahead with a reduction in rates from 24 November.

The impact of negative interest rates

The impact of negative interest rates has finally made it to our shores. With these new proposed interest rates, savers are close to actually having to pay the Treasury to house their money with their cast-iron backing.

While comparatively low inflation figures may act as some kind of comfort, savers have seen the future purchasing power of their cash savings diminish against the impact of inflationary pressures since the global financial crisis in 2008/9.

I usually look beyond CPI as an inflation guide with my financial planning. One could argue that inflation is largely subjective to the individual as it really depends on what you do with your money. If your main outgoings are food and bills then these would have risen a potentially higher rate than CPI or RPI (retail price index). This particularly affects my retired clients and their cash deposits. 

For the last five months, NS&I Income Bonds have been generally seen as the best interest earner in the marketplace, with their 1.16% gross AER rate for balances of up to £1M with instant access. 

Income Bonds are also a popular option for professional deputies and attorneys especially when a client has had to sell their home to pay for care fees for example.

Income Bonds will now fall from 1.16% gross AER down to 0.01% gross AER from 24 November 2020, a staggering fall. This means for someone with £500,000 in Income Bonds, the annual rate of gross interest received before tax will fall from £5,800 down to £50. 

The Direct Saver Account will now fall from 1.00% gross AER down to 0.15% gross AER from the 24th November 2020, another staggering fall. This means for someone with £500,000 in the Direct Saver Account, the annual rate of gross interest received before tax will fall from £5,000 down to £750. 

Is there any competition left in the retail savings market?

With the Bank of England base rate at 0.1% and some mortgage rates at relatively competitive levels, the margins within retail banking are understandably low. For those who wish to shop around, however, it may be possible to generate better cash deposit returns compared to the safe haven of NS&I. 

Savers need to be mindful of the £85,000 deposit holder’s protection threshold per institution. For large cash balances the administration involved in setting up multiple accounts needs to be considered when choosing the right account, the right notice period and indeed the right bank. 

Thomas Westcott can offer our clients access to a third party fintech cash management system. This means one application can allow you to access multiple accounts with both a UK banking licence and membership of the Financial Services Compensation Scheme. In this way, one can spread large cash balances across a multiple of institutions and stay within the £85,000 limit if necessary. 

We can offer advice in this area to charities, court appointed deputies, attorneys, trustees and companies as well as private individuals.

For further advice on this matter, please do not hesitate to contact me or visit our Business Resilience & Protection Service page.

By Simon Lake, Chartered Financial Planner