NS&I slashes Green Bond rate again: these are the best alternatives

NS&I has been aggressively cutting the rate on its flagship eco bond in recent months, meaning you can earn a significantly better rate elsewhere.

National Savings and Investments (NS&I) has once again slashed the rate of its Green Bond, this time to just 2.95%.

Against a general backdrop of falling rates across the savings market, NS&I has been particularly aggressive in reducing its eco bond.

Had you applied just four months ago you'd have bagged a rate of 5.7%.

However, the state-backed institution cut the rate to 3.95% in November and has this week decided to cut it by a further 1% to 2.95%.

To put that into context, the amount of interest you'd earn on a £10,000 deposit over the three-year term has plummeted from £1,710 to just £885 in the space of a few short months.

That means it's no longer an attractive home for your savings if earning a competitive rate is what matters most to you.

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How the NS&I Green Bonds work

We'll take a look at the top alternatives for your cash, but first, let's take a look at how the NS&I Green Bond works to help you understand who it's targeted at.

They were first launched in October 2021 to much fanfare, with the idea of raising funds that would only be committed to backing dedicated eco projects.

It’s a powerful selling point ‒ you get a return on locking your money up for three years, knowing that it will be used to boost environmentally-friendly schemes.

You can deposit anywhere between £100 and £100,000.

The bonds are offered by NS&I, the Government-backed savings provider that millions of us use for things like Premium Bonds.

NS&I is a highly thought of brand because of that Government backing ‒ every penny you save with them is protected by the Government, rather than the £85,000 limit covered by the Financial Services Compensation Scheme.

Finally, the bonds are taxable, assuming your returns exceed your Personal Savings Allowance.

Paying the price for doing the right thing

When the Green Bond paid a rate of 5.7%, it was just 0.35% off the very best 'traditional' three-year savings product.

That is certainly no longer the case.

The latest NS&I Green Bond issue is a whopping 1.65% below the best three-year savings bond on the market.

It means savers who are interested in taking up the new bond will need to be motivated by doing the ‘right thing’, rather than any attempts to get a good return on their cash.

“NS&I Green Bonds have been hit by harsh pruning, slashing the rate from 3.95% to 2.95%," said Sarah Coles, head of personal finance at Hargreaves Lansdown.

"These were always likely to face the business end of a pair of shears as the savings market gradually heads south.

"However, the decision to cut so soon and so hard is disappointing. It raises the question of whether we will see Green Savings grow, or whether the harsh prune has done too much damage. 

"The fundraising target for these bonds is set completely separately to NS&I’s overall funding target, so this change has nothing to do with the fact the organisation is flush at the moment.

"Instead, the Government has decided it has raised as much as it needs to at this rate."

So what are the best homes for your cash if the Green Bond no longer appeals?

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Best three-year savings bond alternatives: earn up to 4.6%

If earning a top rate is what matters most to you and the three-year term suits your needs, then the best alternative is the 3 Year Fixed Rate Bond from Close Brothers.

It pays a rate of 4.6% but does have a fairly onerous minimum deposit of £10,000.

You can save a whopping £2 million in this account, but bear in mind only the first £85,000 will be protected by the Financial Services Compensation Scheme.

The rate is a significant 1.65% higher than the new Green Bond issue: assuming you had a £10,000 pot to set aside, you'd earn almost £500 more interest over the term compared to NS&I's bond. 

If you don't fancy saving with Close Brothers, or the minimum deposit is too high, you can get a rate of 4.55% with Zenith Bank which lets you deposit anything above £1,000.

If your pot is particularly small, Atom Bank's 3 Year Fixed Saver lets you save from just £50 and pays a rate of 4.45%

Given that CPI currently stands at 4%, it's comforting to note that all these accounts are inflation-beating (unlike the Green Bond).