Unfair competition on risk-free interest rates?

NATIONAL SAVINGS Synopsis: Some National Savings & Investments (NS&I) rates have suddenly become competitive.

We commented in an earlier posting that for 2009/10, NS&I´s agreed goal with the Treasury was to stand still, ie to balance inflows with outflows. This meant, in NS&I words, that it would continue ´to focus on balancing the interests of savers, the taxpayer and supporting stability in the wider financial services marketplace by maintaining an appropriate competitive position´.

Usually that ´appropriate competitive position´ has not been especially competitive, but there have been occasional exceptions. One noticeable example emerged on 26 October with the launch of new rates for guaranteed growth and guaranteed income bonds:

Guaranteed Income Bond* Guaranteed Growth Bond
Termyears Old Rate% New Rate% Old Rate% New Rate%
1 1.00 3.85 1.00 3.95
2 3.65+ 4.15+ 3.75 4.25
3 1.70 4.30 1.75 4.40
5 2.55 4.50 2.60 4.60

* Monthly payment rate: AER higher + Online and telephone only

The one year rate is now the best on the market, while the 2 year rate is only beaten by one provider. The longer term rates are not quite so near the top of the tables, but are nevertheless attractive given the Treasury backing NS&I enjoys.

The rate improvements coincide with a move by NS&I to end sales of both types of guaranteed bonds through the Post Office, a change announced on 15 October. All these NS&I guaranteed bonds will now only be available on line, by phone or by post.

The move follows on from the special terms direct-only two year bonds launched in July. The separation of NS&I and Post Office makes sense for both sides. The Post Office has for some time been promoting deposit products – with very similar names to NS&I´s offerings – which are provided by the Bank of Ireland. The current rates for the Post Office growth bonds are 3.70%, 4.25% and 4.55% for 1, 2 and 3 years respectively. The Post Office also has an ISA backed by Family Investments – NS&I´s ISA has been a direct-only investment since April 2009.


NS&I are now offering serious competition to the banks, but it seems unlikely they will squeal given the politics involved. One curious result of the rate improvements is that even for 50% taxpayers, the new growth bonds offer a better net return (2.125% for 2 years and 2.30% for 5 years) than tax-free savings certificates (1.25% and 2.25%). What is more, the overall investment limit for all guaranteed growth and income products is £1m against £15,000 per issue for savings certificates.

Duncan R Glassey
Senior Partner – Wealthflow LLP


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