The best short term rates are disappearing.
National Savings & Investments (NS&I) have announced cuts in interest rates to three of its variable rate products to take effect from 12 September, as shown in the table below. The cuts are no real surprise, not least because the government set NS&I a net fund-raising target for 2013/14 of nil (give or take £2bn). NS&I’s current variable rates leave it at or near the top of the short term savings league table, which means it is liable to attract substantial inflows. The Financial Services Compensation Scheme deposit protection ceiling of £85,000 is irrelevant to NS&I investors, thanks to a Treasury guarantee. As a result the only effective restriction on individual investment is NS&I’s own limits – £2m for Direct Saver and £1m for Income Bonds.
Shortly after NS&I revealed its deferred interest rate cuts, another NS – ONS (the Office for National Statistics) – published May inflation data showing year on year price increases of 2.7% (Consumer Prices Index) and 3.1% (Retail Prices Index). The news was a reminder how far deposit rates have dropped below inflation, even before tax is taken into account. If you are a higher rate taxpayer, you now need a 4.5% gross interest rate to match CPI inflation. However, the best rates available – fixed for a five year term – are under 3%.
Premium Bond Footnote NS&I did not change the prize money rate for premium bonds, which remains at 1.5%. As premium bond prizes are tax-free, in theory that is equivalent 2.5% gross if you are a higher rate taxpayer. The trouble is that the chances of a win each month are 24,000:1 and over 96% of the prizes are just £25.
12th July 2013