Guaranteed Growth Bonds: NS&I savers offered fee-free exit

Change to Guaranteed Growth Bond terms and conditions meant thousands of savers faced shock tax bill, but NS&I has now offered them a way out.

Savers who hold money in NS&I's Guaranteed Growth Bonds have been offered the ability to exit their accounts without having to shell out on an exit fee.

As we covered earlier this year, a quiet change to the terms and conditions of a savings account provided by NS&I could have significant tax repercussions for savers.

How is my interest paid?

Guaranteed Growth Bonds were offered on a range of terms, all the way up to five years, and it was previously the case that the interest earned on the bond was treated as if it was paid on an annual basis.

So let’s say I sign up for a five-year bond.

While I don’t actually receive the interest until the bond matures in five years’ time, from a tax perspective NS&I treated it as if the interest was paid at the end of each of those five years in which the bond was active.

Changing terms 

However, the terms for these bonds was quietly changed a couple of years ago.

The change meant that interest would instead be classed as being earned and paid in the year in which the Growth Bond matures.

So with my five-year bond, from a tax perspective, I’d get all of that interest paid in the final year of the bond. 

And this is important because of the personal savings allowance.

Under the terms of the allowance, we can each earn up to £1,000 in interest from our savings each tax year, without having to pay tax.

This allowance drops to £500 for higher rate taxpayers.

Any sums earned above this point are taxed at your individual rate of Income Tax.

By tweaking the terms of the Growth Bond, it means that far more people are likely to earn above that allowance when their bond matures, and therefore get whacked with a nasty tax bill, taking a slice out of their returns, even though the saver hasn’t done anything wrong.

Understandably, when this emerged a few months ago, an awful lot of NS&I savers were rather upset at the prospect.

Putting things right

To give NS&I some credit, it has recognised that this situation is not exactly ideal, admitting that it wasn’t that clear in explaining the terms changes when they were carried out back in 2019.

And it has written to the thousands of savers potentially affected by the change, to not only explain things more clearly but also to offer them a way out.

Savers who invested between May and September 2019 are being given the opportunity to close their accounts and take the money elsewhere, without having to pay the exit fees and charges that would normally result from doing so. 

Of course, for some savers, it may not be worth moving elsewhere. The rates they are getting on the bonds are far better than they might get from an alternative account, even if they do incur some tax when they receive their interest.

But for others, this is a valuable way out from a tax bill that they were not expecting.