Interest rates are due to be cut by National Savings & Investments (NS&I) on five of its variable rate products, mostly from June 2016. It blames the cuts in part on the fact that for 2016/17 the Treasury has set NS&I a lower net funding target than for 2015/16. There is an element of smoke and mirrors about this, as last year NS&I had the 65+ bonds on sale at rates widely seen as a pre-election carrot.
What does the change in interest rates mean for investors?
The changes will leave Income Bonds and the Direct ISA both paying just 1.00% interest, well below the latest (March) 1.6% rate of RPI inflation. The cuts will take NS&I out of the top rungs of the league tables and are a reminder of one of the more unwelcome side effects of ultra-low interest rates. NS&I is shaving 0.25% off its current rates on these two products but that will represent a drop in income of a fifth.
Will cuts in interest rates affect Premium Bonds?
Premium Bonds will suffer a smaller cut, with the annual prize fund dropping from 1.35% to 1.25%. To deal with this – which equates to a 7.4% drop in total prize payments – two changes are being made:
- The odds of a winning monthly draw will worsen from 26,000:1 to 30,000:1.
- The distribution of prizes will alter, with fewer big payouts. NS&I estimates that the number of prizes of £5,000 and above will drop from 204 in March 2016 to 88 in June 2016.
There has also been a minor change to the terms for reinvesting maturing index-linked savings certificates. The new rate is RPI + 0.01%.
Is there an alternative?
There remain a range of opportunities to earn an income well in excess of NS&I interest rates but if your goal is maximize income it is best to seek expert advice. As a general rule, the higher the income on offer, the more risk needs to be considered, whether in terms of being locked in for a long period or losing capital security.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
For help and advice on investment and the effect of interest rates please get in touch with the team at Hartsfield.
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Categorised in: IFAs
This post was written by Paul Verwoert