National Savings & Investments (NS&I) has hiked its rate to keep up with increased competition from cash savings in the era of rising interest rates, but savers continue to withdraw their cash, according to the latest data from the Bank of England Money and Credit report.
In July, savers put more than £3bn into ISAs in July – the highest inflows for July since 2014 – while some £9bn has been added to cash ISAs in the first three months of this tax year – the largest inflow for that period since ISAs were launched in 1999.
Laura Suter, head of personal finance at AJ Bell, said many now face breaching the personal savings allowance thanks to the rise in interest rates, meaning more will have to shelter their cash in tax-free accounts. Savers can put up to £20,000 in a stocks & shares or cash ISA, with no tax payable on any interest earned.
According to Moneyfactscompare, savers can get 4.5% from an easy access cash ISA through Newcastle Building Society, while the top fixed-rate ISA is a one-year deal from Shawbrook Bank paying 5.78%.
Conversely, around £300m has been withdrawn from NS&I in the past two months. As such, the government-backed bank has upped its rates to compete in the challenging market.
It now offers the most competitive one-year fixed rate savings account, which pays 6.2%, up from 5%. Interactive investor senior personal finance analyst Myron Jobson said it is a move that “throws down the gauntlet to high street banks”.
“The move is a real statement of intent by the NS&I amid persisting cost-of-living pressure which has prevented many from saving,” he added.
Andrew Griffith, economic secretary to the Treasury, said: “It’s vital that savers are able to benefit from recent interest rate rises, so I’m delighted that NS&I is releasing new issues of guaranteed growth bonds and guaranteed investment bonds at more than 6% – the highest rate since they were launched. For further peace of mind, the Treasury provides a 100% guarantee on these savings”.
Part of this drive to draw savers’ money in is due to NS&I’s bold net financing target of £7.5bn for the current tax year, which is 25% more than its the £6bn target for the previous tax year.
Suter noted that it was “no surprise” the savings provider increased the payout on its fixed-rate accounts, having previously upped its prize draw winnings on Premium Bonds to attract savers.
“But in the face of higher interest rates elsewhere, savers are voting with their feet and moving to the highest paying account. The draw of Premium Bonds also dwindles when you’re giving up high guaranteed savings rates elsewhere. We will doubtless see more rate increases from NS&I as it tries to compete with challenger banks to meet its funding target for the year,” she said.
Fixed-rate accounts continued to be popular at the expense of easy-access accounts, with £10.2bn of money withdrawn from the latter and £10.1bn put into fixed-rate accounts, the report found, with savers choosing to lock in offers now in the anticipation that interest rates are at or near their peak.
However, Suter warned: “Anyone tying up money needs to be sure they won’t need to get their hands on it in the meantime, as many accounts have stringent exit policies that block you from accessing your money during the fixed term.”
If saving for longer periods, Jobson added that those who can afford to put money away for five years or more should “consider investing for the potential of inflation beating returns that far outstrips savings rates”.
“Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows whilst benefiting from the long-term potential that comes with this approach,” he concluded.