It's been a terrible past year for savers. Rates have plummeted ever since the Funding for Lending scheme was launched last August leaving it nigh-on impossible for savers to get an inflation-beating return.
National Savings & Investments, currently top a number of the This is Money savings tables and beloved of savers, announced a savage cuts to its savings rates yesterday, to take effect from September.
Its Direct ISA has been slashed from 2.25 per cent to 1.75 per cent, Direct Saver from 1.5 per cent to 1.1 per cent and Income Bond from 1.75 per cent to 1.25 per cent.
Strict rules on how the Government-backed saving vehicle is run mean that it has been forced to lower rates. Cuts to rival accounts left NS&I at the top of the best-buys in several categories and cash flowed in from savers.
NS&I has a target deposit level set at the start of each financial year: It must raise or lower rates to prevent total deposits from reaching £2billion above or below this level.
The cut in NS&i rates means they now sit far below inflation - currently at 2.4 per cent. No other easy access savings account, or even cash Isa, will beat it either.
More... Premium Bonds Calculator: Have I won? NS&I hunts for winners of £44m in unclaimed prizes - including three for £100k We track down Agent Million who travels the country to deliver £1m worth of good news Best savings rates: Fixed-rate accountsThe squeeze on savings accounts is making another NS&I vehicle increasingly attractive. Premium Bonds have become a default option for many looking to stash cash long-term. Premium Bonds money is often parked for years - bonds are held for an average of 13 years.
Danny Cox from Hargreaves Lansdown, says: ‘Savers are increasingly faced with below inflation returns on their cash, or taking risk in the markets.
‘Higher rate taxpaying savers shouldn’t ignore NS&I Premium Bonds as an alternative to a savings account where after-tax cash returns are paltry.
‘In some cases investors should forego the guarantee of a small amount of interest they will receive from taxable savings and invest in Premium Bonds, with the hope of winning tax-free prizes of at least the same amount as they would have earned in after tax interest. There is a chance of winning more and of course one person will win the monthly £1million prize.’
The tax-free annual prize fund for Premium Bonds is equivalent to an interest rate of 1.5 per cent, however bond holders should not assume this would be their average rate of return – they could win less or more than this.
Savings struggle: Rates have fallen dramatically in the last ten months - and could drop even furtherTo beat inflation, a basic rate taxpayer at 20 per cent needs to find a savings account paying three per cent, while a higher rate taxpayer needs to find one paying 3.99 per cent.
Currently, only one account does this – Virgin Money’s five year fix. However, many experts warn against opening such a long-term savings product.
The best buy easy access account is 1.75 per cent from NS&I – which will drop in September. Nationwide and Derbyshire have the next best at 1.7 per cent – and both come with bonuses. The top paying cash Isa is 2.3 per cent from Cheshire Building Society.
The probability of a higher rate taxpayer winning prizes higher than the net return of a savings account paying 1.75 per cent gross is 78.9 per cent – assuming the maximum £30,000 is put into Premium Bonds and held for a year, according to Hargreaves Lansdown.
Winnings on Premium Bonds are tax-free and you can hold a maximum of £30,000.
NS&I says that in its August 2012 draw, there was one in 9million chance of a £5,000 holding winning the jackpot.
The chances of a Premium Bond holder winning the next biggest prize of £100,000 with £5,000 worth of holdings is 1 in 1.8million. Holding a maximum of £30,000 in Premium Bonds means the odds change to a one in 1.4million chance of winning the £1million prize.
