New NS&I savings bond: is it a good deal?

Savings and ISAs

Updated on 24 November 2016 | 0 Comments

Chancellor Philip Hammond announced in his Autumn Statement that there will be a new NS&I savings bond paying 2.2% next year. Will it be worth going for?

A new ‘market-leading’ National Savings & Investment (NS&I) bond will be launched next year to help struggling savers.

Chancellor Philip Hammond announced the deal as a sweetener in the Autumn Statement yesterday.

The new three-year NS&I bond will pay a fixed rate of 2.2% and will be open to anyone aged 16 or over.

Like the popular NS&I 65+ Guaranteed Growth Bonds (more commonly known as Pensioner Bonds), the new NS&I bond will be a limited-issue product.

It will be available from spring 2017 for 12 months.

Is it a good deal?

The new NS&I bond will offer a far better rate compared to the top three-year fixed-rate deals on offer today.

The current market-leading three-year savings account is from Ikano Bank and pays 1.63% on balances from £1,000 up to £1 million.

In fact, the NS&I deal beats the return on top seven-year fixed rate bonds at the moment.

It’s also likely that, with savings rates being slashed almost daily, the NS&I bond will look even more attractive when it's finally launched.

But that’s not to say it will be the best home for your cash.

Low savings limit

For starters, the maximum amount you can save is capped at just £3,000.

One of the key selling points of NS&I savings accounts is that 100% of deposits are backed by the Government.

So it's unfortunate the new deal won’t allow people to save more – or at least match the Pensioner Bonds launched last year, which were capped at £10,000. 

This means it's far more restrictive than traditional fixed-rate savings accounts, which often allow you to save as much as £1 million.

Read: Savings protection limit to rise to £85,000

Better rates available elsewhere

The limit also makes the rate of return less impressive when you consider that savers with smaller balances would be much better off opening a high-interest current account.

The Nationwide FlexDirect for example offers 5% on balances up to £2,500, fixed for 12 months. The account will give you easy access to your cash and pays 2.8% more than the Government’s proposed ‘market-leading’ deal.

The Lloyds Bank Club Lloyds account currently pays tiered rates with 4% on offer for balances between £4,000 and £5,000.

From January 8, 2017 it will pay a flat rate of 2% on balances up to £5,000, which is just 0.2% shy of the Government deal.

Meanwhile the TSB Classic Plus, which currently pays 5% on balances up to £2,000 will pay 3% on balances up to £1,500 from January 4, 2017.

For larger balances there’s the Santander 123 Current Account which pays 1.5% on balances up £20,000.

Limited appeal

In summary, the NS&I account is of limited use to savers with a large lump sum because of the £3,000 cap. Conversely, new savers won't be able to take full advantage as they won't be able to make regular deposits.  

If you are a new saver, you could be better off using regular savings accounts, which often pay higher rates and allow savers to drip feed money in, or one of the current accounts mentioned above.

Why getting the best rate is important

Savers should always try to chase the best rate to help protect their money being eroded by inflation.

With inflation predicted to soar to 2.7% by 2018, the proposed NS&I 2.2% deal could be a bad home for cash and savers should exploring all deals.

Admittedly some high-interest current accounts haven’t been immune from the downward force on interest rates seen with traditional high street savings accounts since the Base Rate was cut to 0.25% in August.

But even after the cuts they are likely to be top for those with modest balances.

Take a look at Where to earn most interest on your cash for the top deals on easy access, notice, fixed-rate bonds, high-interest current accounts and peer to peer savings to give you a better picture of the best homes for your money.

Compare savings accounts with loveMONEY

More from loveMONEY:

 Lifetime ISA: what it is and how it works

 NS&I Premium Bonds: how to buy, cash in, claim lost prizes and more

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