Should You Trust The Government With Your Money?

Do National Savings and Investments accounts really have anything decent to offer savers?

For some of you finding a safe haven for your savings is the number one priority. That's why National Savings and Investments (NS&I) accounts are so popular right now. NS&I is backed by the Treasury and so cash held in NS&I accounts is about as safe as it gets.

But what does NS&I have to offers savers and are the returns any good? Let's take a look at some of the latest range:

NS&I index-linked savings certificates

Until now I quite liked NS&I's index-linked savings certificates because they provide a return which beats inflation by 1% (based on current rates). This is great for generating a real return on your savings. What's more index-linked certificates are completely tax-free too.

But there's a hitch. Certificates pay a return which is linked to inflation measured by the Retail Prices Index (RPI). But since RPI has recently dropped to 0.9%, the current interest rate is now just 1.9% (RPI + 1%). (The government's favourite measure of inflation - the consumer price index - is currently higher at 3.1%).

While the return from these certificates is still ahead of RPI, my personal rate of inflation feels much higher. So I suspect many savers won't be too impressed with a rate of 1.9%, especially since cash must be locked away in a certificate for a term of three or five years.

That said index-linked certificates have been pretty good in the past. For instance, a five-year certificate opened with £1,000 in January 2004 would now be worth £1,255 - that's equivalent to a tax-free annual return of 5.1%. But if low inflation persists - or worse still deflation (falling prices) sets in - returns could be lower in the future.

NS&I fixed interest savings certificates

The base rate has been cut to a new all-time low of 1.5%. This means savings accounts across the board have been trimming back their rates. That's one big reason why accounts which pay a fixed return are attractive right now.

NS&I fixed interest savings certificates pay a guaranteed rate over a two or five-year term. And like the index-linked version, they're free of tax.

But I think if you want to lock-in your return before rates fall any further there are better alternatives out there. The two year certificate pays interest of just 1.90%, while the five-year version pays 2.35%. But neither measures up well against the competition. Today the most competitive fixed rate bond is the ICICI Bank UK HiSave Fixed Rate Account which pays a much higher rate of 4.65% for 12 months.

Premium bonds

Premium bonds are a bit unusual. Instead of earning interest on your savings, you'll be entered into a draw every month where you'll have the chance of winning tax-free prizes. You'll need £100 to get started or £50 if you want to save monthly.

But the premium bond prize fund rate - which is the amount paid out in prizes as a proportion of the total amount invested - is tiny at just 1.8% a year. Worse still, the actual return on your savings could be even less if you don't have `average luck'. And don't forget the odds of winning aren't great at 36,000 to 1! (Each £1 bond unit has a 36,000 to 1 chance of being drawn, so the more you have the better.)

NS&I is considering introducing a new lower £25 prize (the minimum is currently £50) to allow bondholders to win more frequently. But I still don't think that would make premium bonds particularly attractive.

Here's more on Why Premium Bonds Don't Make Good Savings Accounts.

NS&I direct ISA and cash ISA

It's a good idea for savers to use up their cash ISA allowance to make the most of a tax-free return. NS&I has two easy access accounts on offer - the Direct ISA and the Cash ISA. Unfortunately, the rates aren't much to write home about. The Direct ISA pays 2.30%, while the Cash ISA version pays a tiny 1.40%.

True, cash ISA interest rates have fallen fast lately, but there are still better returns available. Alliance & Leicester and Standard Life Bank, for example, both offer easy access ISAs which pay 3.50%. If you're happy to lock your money away for a while, you could earn rates between 3.70% and 4.10% with the Fixed Rate Halifax ISA Saver.

Easy access account and investment account

I won't dwell on these savings accounts for too long other than to say with interest rates of 1.20% or less, savers would be wise to choose something else. If you're looking for instant access, I think the ING Direct UK Savings Account at 4% (including a 1.95% bonus for 12 months) is a much better bet.

On a final note, the Bank of England has just revealed the average savings account is now paying a pathetically low interest rate of just 0.81%. So that means most NS&I products are, at least, paying an above average return even though they are not the market leaders. That said I still think savers are probably better off elsewhere.

> Get a better savings account here.

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