Page last updated at 12:45 GMT, Monday, 26 October 2009

NS&I raises rates for new savers

Money
Building societies say state-backed institutions have an unfair advantage

National Savings and Investments (NS&I) has announced a big increase in the interest rates on some of its policies.

Rates on its guaranteed growth bonds and guaranteed income bonds are going up by as much as 2.95% for new savers.

It means some of the fixed rate policies will now pay 4.6% a year before tax.

The change is a direct challenge to banks and building societies, who have also become increasingly keen to attract savers' money.

"Customers can choose to invest between £500 and £1m in our one, two, three or five-year bonds," said John Prout, a director at NS&I.

Fierce competition

The international banking crisis has meant that banks, building societies and the government have been forced to compete vigorously to attract savings from the public.

Customers looking to lock their savings away for a short term will welcome the news
Andrew Hagger, Moneynet

Although most existing savings accounts offer very little interest, those targeted at new savers are very different.

With inflation as measured by the retail prices index (RPI) currently negative, savers opening new accounts can now expect an attractive real return on their money.

"Customers looking to lock their savings away for a short term will welcome the news that NS&I has launched a one-year fixed rate paying a market leading 3.95% gross," said Andrew Hagger of Moneynet.co.uk.

"The two-year rate of 4.25% gross sits just below the top player in the two-year market (AA is tops with 4.35%) whilst the longer term products at three and five years are less competitive," he added.

Building societies have complained that competition from state backed institutions, such as NS&I and the nationalised Northern Rock, has been too fierce and unfair.

In the past financial year, 2008-09, NS&I saw a huge inflow of extra cash as savers looked for a completely safe home for their money during the international financial crisis.

It drew in £26bn during the year, far in excess of the original target set for it by the government.

That position then eased as some savers moved their money out again, with an outflow of £4.5bn from NS&I in the three months to the end of June.

In May however, it raised the interest rate on its instant access savings account, called an income bond, by 1%.

That meant deposits in the account of between £500 and £24,999 are now being paid 1.7% a year while those of £25,000 or more are paid 2% a year.

And this month it increased the prize fund payout rate on its Premium Bonds from 1% to 1.5%, taking their total payout from £33.8m to £52.5m.



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