NS&I savings certificates rate to fall – should I transfer my cash?

There are less than two months left before roughly half a million savers could be hit by a change that could wipe out a large chunk of interest.

In a move announced last October, the rate paid on National Savings and Investments’ index-linked savings certificate will be calculated using the lower Consumer Prices Index from 1 May, plus 0.01 per cent.

Currently, the rate is calculated using the Retail Prices Index, which sits at 2.5 per cent currently, compared to the CPI’s 1.8 per cent. 

The change will affect current holders who choose to renew at the end of their term when their certificates mature. 

Poker face: What should savers do when it comes to NS&I certificates? With the current rate of the CPI 1.8%, lower than the 2.5% rate of the RPI, could your savings be squeezed after May 1 because of NS&I's changes? With the current rate of the CPI 1.8%, lower than the 2.5% rate of the RPI, could your savings be squeezed after May 1 because of NS&I's changes?

With the current rate of the CPI 1.8%, lower than the 2.5% rate of the RPI, could your savings be squeezed after May 1 because of NS&I’s changes?  

The RPI figure is then checked again 12 months later. If it is lower than the starting point because of deflation, negative index-linking will not be deducted from the investment. If it is higher, positive index-linking will be added.

The RPI end level is then divided by its starting level, and then multiplied by the value of the certificates in order to work out the return. 

For example, if a certificate was worth £1,000 and the starting RPI figure was 114, and one year later the RPI figure issued the month before was 119, the return would be £43.86. 

This would be 119 divided by 114, multiplied by 1,000. You would then add £1 onto this, as a fixed-rate of 0.01 per cent is added onto the inflation figure.

However, because we don’t know what the rate of inflation will be in 12 months, we will do the calculations based on the most recent rates of inflation. The most recent rate of CPI is 1.8 per cent.

Therefore, the start level for any certificates renewed from May based on the current rates would fall from a current rate of 2.51 per cent to 1.81 per cent.

Someone who held £10,000 would previously earn around £251 a year in interest, but this will drop to around £181 if you renew your certificates on the lower rate.

If you held £100,000 worth of certificates and decide to renew them once the changes come into force, then you could potentially be losing £700 a year due to receiving interest calculated on the lower rate.

In a scenario in which a saver held £500,000, they would lose more than £3,000, with the interest on their certificates falling from £12,550 to £9,050.

This obviously assumes the rate of inflation would remain constant over the course of a three or five-year term.

Should I stay or should I go?

NS&I’s certificates also have several advantages beyond the fact it will always pay above inflation. 

The interest paid is tax-free, while being a branch of the Treasury means that all deposits with NS&I up to the maximum £2million are all guaranteed, as they are backed by the Government.

This is a much higher deposit protection than the £85,000 offered by the Financial Services Compensation Scheme, which covers cash Isas and savings accounts, which means those with savings above that amount might be worried about finding a new home with their cash.

How can I cash in?

NS&I say that customers will be written to 30 days before their certificates are due to mature and will be offered the opportunity to renew their investment on a term of the same length, renew their investment on a term of different length or to cash in their investment.

Customers who choose to cash in their investment at the end of their term are able to do so by completing the form that comes with the maturity pack.

The bank added that due to the changes to the certificates, customers who choose to renew their certificates have the right to cancel within 30 days after their investment starts, if they change their mind.

What’s more, the cash Isa allowance of £20,000 a year for 2018/19 and 2019/20 means that savers with higher deposits would likely exceed the personal savings allowance of either £1,000 or £500 – depending on whether you are a basic or higher-rate taxpayer – and therefore have to pay income tax on their accrued interest, because they would have to deposit the money in a savings account rather than a cash Isa.

While NS&I’s offer gives you the advantage of always paying above inflation, unless the rate shoots up from its current 1.8 per cent, then a number of fixed-rate accounts offer interest rates that will beat it. 

Some of the top rates in This is Money’s tables even beat the current rate of RPI.

Looking exclusively at three and five-year fixed-rate deposits, then the top rate for both is offered by Gatehouse Bank. 

The bank is Sharia compliant which means it pays an expected profit rate, rather than interest, which in practice works the same way.

Its three-year pays 2.5 per cent, and five-year 2.75 per cent. Both allow a maximum deposit of £1million, but your savings are only covered by the FSCS up to £85,000, so bear that in mind.

If we take the earlier three examples of £10,000, £100,000 and £500,000, you would earn around £250, £2,500 or £12,500 in interest a year with the three-year fixed-rate, respectively.

How much would you earn in interest on a deposit of £100,000? Interest earned with NS&I after May 1 change –  rate of 1.81% Interest earned with Gatehouse’s 3-year fixed-rate after tax – rate of 2.5% Interest earned with Gatehouse’s 5-year fixed-rate after tax – rate of 2.75% £1,810 £2,200  £2,400 

In the case of the five-year, you would receive £275, £2,750 or £13,750, depending on how much you had deposited.

In all three examples you would receive a higher gross return than if you kept your money with NS&I, at least directly comparing the current rate of CPI with the rate offered by Gatehouse.

However, with the latter two deposit amounts you would be paying income tax on the interest payments as they exceed the £1,000 personal savings allowance.

If you are a basic-rate taxpayer, this would mean that in the case of the three-year fixed-rate you would be paying 20 per cent tax on either £1,500 or £11,500 – the amount earned in interest beyond the PSA.

After tax therefore you would earn £2,200 or £10,200 a year in interest, once you add the £1,000 you were tax-exempt back on.

In the case of the five-year fixed-rate, you would be paying it on £1,750 or £12,750. You would therefore end up with a net return of either £2,400 or £11,200.

This means that after tax you would be over £2,000 better off if you opened either a three or five-year fixed-rate with Gatehouse and deposited £500,000 than if you stuck with NS&I. 

Cash Advice Service

If you are a saver with more than £85,000 in your nest egg who’s worried about depositing their money and it not being protected, Savings Champion could help.

Its Cash Advice Service helps savers with larger sums to spread their cash among multiple banks and building societies so it is all protected by the FSCS, for a small fee.

They say they find the best rates from the whole UK savings market and assist with the paperwork, but the account will remain in your name the entire time. 

If you deposited £100,000 you would be around either £400 or £600 better off, respectively, with the three or five-year fixed-rates with Gatehouse than with NS&I.

But if you don’t like the idea of subjecting your savings to the taxman, or if you have a deposit over £85,000 and you’re squeamish about entrusting it to someone else that doesn’t offer the same level of protection, then the certificates do retain a range of perks worth considering – despite the lower interest rate. 

Anna adds: ‘The recent fall in inflation reduces the immediate value of IL certificates – with even short term fixed rate bonds and some notice accounts paying gross rates that match or beat CPI inflation.

‘But as these certificates are still tax-free accounts and effectively will guarantee to remain in line with inflation, albeit as a lower rate, they will continue to offer good value for many customers, especially tax payers who are fully utilising their personal savings allowance.

‘For example, a higher rate taxpayer already fully utilising their PSA will earn a net rate of 1.44 per cent after 40 per cent tax has been deducted, if they have funds in the current best paying three year fixed rate bond which is paying a gross rate of 2.4 per cent.’