Reduction in NS&I interest rates leaves savers unsure of where to invest cash
Although cash offers the lowest potential return of all investment types, it is also usually the lowest risk asset class.
Cash typically complements higher risk assets within a portfolio and provides a safe haven for capital needed to cover immediate and short term goals.
National Savings & Investments is one of the largest savings organisations in the UK, offering a range of savings and investments to 25 million customers. All NS&I products offer 100% capital security as NS&I is backed by HM Treasury. This has always been a major draw when placing cash savings as conventional cash accounts with other providers are subject to a maximum protection of £85,000 via the Financial Services Compensation Scheme (FSCS).
Recently however, National Savings and Investments (NS&I) advised of a reduction in their interest rates (NS&I Interest Rate Changes) due to come into force on 24 November 2020, detailed below:
Variable rate savings products
|Product||Current interest rate||Interest rate from 24 November 2020 (change in brackets)|
|Direct saver||1.00% gross/AER||0.15% gross/AER (-85 basis points)|
|Investment account||0.80% gross/AER||0.01% gross/AER (-79 basis points)|
|Income Bonds||1.15% gross/1.16% AER||0.01% gross/0.01% AER (-114/115 basis points)|
|Direct ISA||0.90% gross/AER||0.10% gross/AER (-80 basis points)|
|Junior ISA||3.25% gross/AER||1.50% gross/AER (-175 basis points)|
Source: www.nsandi-corporate.com 21St September 2020
This was done for a number of reasons:
- NS&I must strike a balance between the interests of savers, taxpayers and the broader financial services sector,
- Changes will ensure that NS&I’s interest rates are aligned appropriately against those of competitors,
- Interest rate reductions will apply to variable rate and some fixed term savings products
Ian Ackerley NS&I Chief Executive, recently commented in the Daily Express 21st September 2020:
“Reducing interest rates is always a difficult decision. In April we cancelled interest rate reductions announced in February and scheduled for 1st May. Given successive reductions in the Bank of England base rate in March, and subsequent reductions in interest rates by other providers, several of our products have become ‘best buy’ and we have experienced extremely high demand as a consequence.. It is important that we strike a balance between the interests of savers, taxpayers and the broader financial services sector; and is it time for NS&I to return to a more normal competitive position for our products.”
The reduction in interest rates across the market means investors will need to search harder for the best rates.
It is worth remembering that despite being classed as a low risk holding, there remains a number of ‘risks’ associated with this asset class, namely (but not limited to):
- Default Risk: How financially secure is the deposit taker. What are the chances of a default, during a financial crisis
- Inflation Risk: Is there a risk that inflation will undermine cash returns, through a decline in the purchasing power of your capital
There remains a number of alternatives to NS&I and cash investment as a whole. This varies across the risk spectrum linked to individual client circumstances and typically focuses on the following:
- Specific investment objectives
- Investment term and time horizon
- Attitude to investment risk, tolerance to financial loss and the overall capacity for financial loss
- Existing investment portfolio
Ultimately, there remains a place in any financial plan for cash holdings and maintaining a robust financial plan is paramount during periods of low interest rates and volatile investment markets.
As Whole of Market financial advisers, MHA Tait Walker Wealth Management can provide tailored financial advice to your individual circumstances.
This article is for information only and should not be seen as advice or a recommendation to take action.
MHA Tait Walker Wealth Management is a trading style of Tait Walker Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. Tait Walker Financial Services Limited trading as MHA Tait Walker Wealth Management is a member of MHA. MHA is an independent member of Baker Tilly International Limited, the members of which are separate and independent legal entities.