NS&I to cut rates on old accounts

NS&I is 'simplifying' accounts available before 1996, leaving 90,000 facing a rate reduction.

Thousands of National Savings and Investments (NS&I) customers will suffer a rate cut from November.

The Government’s savings arm is overhauling its old Savings Certificates to bring them into line with modern banking practices.

The changes will impact some certificates that were on sale between 1916 and 1996.

In total 967,000 accounts, with nearly £745 million invested, will have their returns 'simplified'.

For 853,000 there will be no rate change. The General Extension Rate Fixed Interest Issues 7-43, which were available between 1940 and 1996 and attract a return of 0.09%, will just change from paying interest every three months to paying interest daily.

But 89,057 other certificates will experience a rate drop from the 11th of November 2013.

Impacted certificates

Fixed Interest Issue 1 War Savings Certificates, available between 1916 and 1920, will be negatively affected as will Fixed Interest Issues 2–6, ehich were available between 1920 and 1939.

Nearly 9,000 people hold these accounts, with an average investment of £194.

They’ve been targeted because they have a unique way of calculating returns that is becoming difficult for NS&I to replicate. Rather than using a simple interest rate, each certificate has a unit value which attracts a specific amount of interest each year. The return is set in old pence, but is equal to around 5p in new money.

Modernising this calculation will mean the rate, which currently pays the equivalent of 1% per annum, will change to the General Extension Rate which pays 0.09% - a drop of 0.91%.

Elsewhere over 80,000 customers with Index-linked Savings Certificates taken out between 1975 and 1990 will also be negatively impacted.

These certificates were popular because they guaranteed to keep pace with inflation using the Retail Prices Index – a measure of the annual change in the cost of goods.

Old Index-linked Savings Certificates pay a mixture of interest, bonuses, fixed cash payments and supplements. But now NS&I will only pay the RPI.

For example Issues 3 and 4, available between 1985 and 1990, currently tracks RPI and pays a 0.5% annual bonus on top. But it will now only track the RPI rate each month, reducing the bonus to nothing.

The other Issues to be streamlined are 1 and 2, both on sale between 1975 and 1985, though the impact is less severe. These currently pay a 4% bonus on five- and ten-year anniversaries, along with seven annual supplements.

NS&I says that savers may earn slightly less, but the impact will be small.

Choices

NS&I said that it would be giving three choices to the thousands affected by the change:

1) Cash in their investment

2) Reinvest the value of the investment into a current Issue of Savings Certificates. The current issue of the Index-linked Savings Certificates for example pays RPI plus a 0.05% bonus.

3) Leave their money invested under the new arrangements.

Time to move on

NS&I started life as the Post Office Savings Bank in 1861, but came under the control of the Exchequer in 1996. The relationship means investments are 100% protected as they are backed by the Treasury.

This protection, plus attractive rates, have proved popular with savers fed-up with paltry offerings elsewhere. But NS&I has to balance the interest of taxpayers, savers and its impact on banks and building societies, so the flood of money meant the balance has been disturbed.

The increased popularity led to cuts being made to the NS&I savings products range which take effect in September, as well as a reduction in the prizes for the hugely popular Premium bonds.

NS&I says the latest cuts to old accounts are unrelated and for Index-linked savers there is a lifeline with the opportunity to join a new issue.

Nonetheless it has been a wake-up call to savers suffering on paltry returns, like those that will be put onto a rate of 0.09%. For these savers now might be the time to trade in the security of NS&I and chase after a better rate.

Some alternatives

One alternative that is becoming popular is peer-to-peer savings. These allow savers to lend their money to people that want to borrow via platforms like Zopa or Ratesetter, cutting out the middle man and giving better rates to both parties.

However, peer-to-peer lending is more risky than traditional savings accounts as as they aren’t yet covered by the Financial Services Compensation Scheme (FSCS) which protects up to £85,000 worth of deposits per individual per institution in normal accounts.

So if you don’t fancy the risk, take a look at the top rates going elsewhere:

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