NS&I raises British Savings Bonds rates to as much as 5.17%: are they worth it?

What's happened

National Savings & Investments (NS&I), the savings bank owned by the Treasury, raised the rates on all four of its fixed-term British Savings Bonds on Tuesday 6 October. Three of the four terms now pay more than 5%.

• One-year bond: 4.99% AER, up from 4.82%
• Two-year bond: 5.07% AER, up from 4.81%
• Three-year bond: 5.10% AER, up from 4.83%
• Five-year bond: 5.17% AER, up from 4.85%

The five-year bond saw the biggest jump, at 0.32 percentage points. The new rates apply to the Guaranteed Growth Bonds, which add interest each year and pay it out at the end, and to the Guaranteed Income Bonds, which pay interest monthly. The Income Bonds pay slightly lower gross rates (from 4.88% for one year to 5.06% for five years) that work out at the same AER because the interest arrives sooner.

Rachel Springall of Moneyfactscompare called the increases "a welcome boost", saying they reflect "the wider uplift in savings rates and expectations surrounding future interest rate decisions".

How the rates compare

NS&I isn't top of the tables, but it's close. MoneySavingExpert says the best rates elsewhere include 5.12% from Union Bank of India for one year, 5.16% from Close Brothers for two years and 5.35% from DF Capital for five years. It adds that for two and three-year terms, NS&I beats big-name providers such as Tesco Bank and Skipton Building Society. Rachel Springall cautioned that "savers will find rates higher elsewhere, as all these newly priced bonds from NS&I sit outside of the top rate tables."

The big difference is protection. Banks and building societies are covered by the Financial Services Compensation Scheme up to a limit, but NS&I is backed by the Treasury, so every penny is protected.

Who's affected

• Savers with a lump sum they won't need for a while. You can't withdraw early, so the money is locked away for the full term.
• People with a maturing NS&I bond. The new issues are open to existing customers rolling over as well as new customers. NS&I says it contacts you at least 30 days before your bond matures to explain your options.
• Anyone with large savings. With a maximum of £1 million per person per issue and full Treasury backing, NS&I suits people with more than the FSCS limit at one bank.

You need to be 16 or over, the minimum is £500, and you apply and manage the bonds online (NS&I offers phone support if you can't go online). Payments are by UK debit card.

What it means in pounds: a worked example

Say you put £10,000 into the five-year Guaranteed Growth Bond. At 5.17% a year, with interest added annually and left to grow, you'd have about £12,866 after five years. NS&I's own example puts £1,000 at £1,286.64, which matches.

• At the old rate of 4.85%, the same £10,000 would have grown to about £12,672, so the rise is worth roughly £195 over the term.
• At DF Capital's 5.35%, it would reach about £12,977, around £110 more than NS&I, in exchange for FSCS rather than Treasury protection.
• Over one year, £10,000 earns £499 at NS&I's 4.99% and £512 at Union Bank of India's 5.12%, a £13 difference.

Interest is taxable. A basic-rate taxpayer has a £1,000 personal savings allowance and a higher-rate taxpayer £500, so a higher-rate taxpayer with £10,000 in the bond (about £517 interest a year) could already be over their allowance. These figures ignore tax.

What to do now

1. Keep an emergency fund in easy access first. Rachel Springall advises savers to keep money they can get to quickly before locking anything away.
2. Compare before you commit. Within the FSCS limit, a smaller bank may pay a little more.
3. Check your maturing bonds. If an NS&I bond is due to mature, compare the new rates with the wider market before rolling over.
4. Choose growth or income. Pick the Income Bond if you want monthly interest to live on, or the Growth Bond if you want it to build up.
5. Think about tax. If you're likely to go over your personal savings allowance, consider whether your ISA allowance makes more sense for some of your savings.
6. Don't wait too long. Rachel Springall warns that "attractive deals don't always last for long, particularly if a provider attracts enough deposits."

Your questions answered

Can I get my money out early?

No. NS&I says that once you invest you can't access the money until the bond reaches the end of its term.

Is my money safe with NS&I?

Yes. NS&I is backed by the Treasury, so all deposits are fully protected with no FSCS-style limit.

What's the difference between Growth and Income Bonds?

Growth Bonds add interest each year and pay it all at the end. Income Bonds pay interest monthly into your bank account.

Ways to save

If you have a mortgage as well as savings, compare what your savings earn with what your mortgage costs. A fee-free broker such as Cashback Remortgages can help when your deal is ending. Trimming everyday spending, for example buying long-life groceries in bulk from ClearanceXL, frees up more to put away.

Sources: MoneySavingExpert, Trustnet, AOL, NS&I, GOV.UK

Ad: affiliate links. The codes and deals below link to the stores, and we may earn a commission if you buy, at no cost to you. How we make money.