NS&I, the government-backed savings provider, is offering a wider range of account options on the bonds, which are aimed at helping people save money for the longer-term.
As such, savers must lock their money in for a set period to benefit from the interest rate.
The two-year British Savings Bond will have a rate of 4.6% AER whilst the five-year version pays interest at 4.1% AER.
There is also a three-year bond with an AER of 4.35%.
All are available in income and growth versions. Those opting for the income version will receive their interest as a guaranteed monthly income. The growth version, meanwhile, pays the interest at the end of the term.
The minimum investment is £500 and the maximum is £1million.
Laura Suter, director of personal finance at AJ Bell, said whilst the rates on offer were less than the current market leader, she expected the Bonds to sell quickly.
Indeed, the one-year version of these bonds that went on sale in Autumn last year sold out in five weeks, with over a quarter of a million customers depositing money in the account which paid 6.2%.
However, Suter explained the interest rates on these new bonds weren’t ‘as enticing’.
“There are a number of providers in the market offering higher rates,” she said. “The top two-year fixed rate account in the market pays 5%, compared to the 4.6% on offer from NS&I.
“It’s the same case with the five-year bonds, where the market leader is paying 4.55%, compared to the 4.1% from the British Savings Bond. On the two-year version of the bond you’d be sacrificing £20 a year interest on £5,000 saved, which some savers may feel is a sacrifice worth making.
“It’s tricky for NS&I to get the interest rate right on these products: too high and they’ll attract swathes of cash and have to pull the accounts from sale, too low and savers will go elsewhere, meaning NS&I will have to crank up the interest rate later.”
A few things to consider before investing with British Savings Bonds
Suter said savers considering using these accounts should be aware of the following points before depositing their cash.
You can’t withdraw your money early
“Under some previous versions of these bonds NS&I allowed people to exit the bonds early if they sacrificed some interest,” she explained. “But that’s no longer allowed, meaning that the money is tied up for the full term with no option to exit early.”
Minimum and maximum investments
You can invest up to £1 million in the British Savings Bonds. But as there is a minimum investment of £500, you will need a reasonable lump sum to open the bond.
Do you want interest now or later?
Suter explained the income version, where you receive interest each month, is a good option if you need the money each month to live off. She said it would be ideal for retired people for example.
“However, if you don’t need the income pick the ‘Growth’ option,” she advised, “which means the interest is rolled up and added to the bond each year and then you can only access it at the end of the fixed term. Bear in mind your tax situation though.”
Check if you might be taxed?
Unlike NS&I’s Premium Bonds the Bonds are not tax-free. It means that you could pay tax on the interest you earn, Suter warned.
The Personal Savings Allowance gives most people a tax-free limit for the interest they can earn on their savings before they’re taxed. It currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional rate taxpayers get no tax-free allowance.
Suter explained: “It means that once you breach the limit you’ll pay tax on the interest at your income tax rate. If you’re likely to face a tax bill for the interest you might want to weigh up whether an ISA would be better for your cash savings.”
Government backing
Suter said: “A big appeal of NS&I is that they are backed by the government, so they are seen as the safest place to keep your money. However, other banks and building societies are protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution.
“This means that your money is theoretically as safe in any other bank with FSCS protection as it is with NS&I. But regardless some people will feel much safer with their savings being with the government.
“Plus, anyone with a large amount of savings may prefer to put their money with NS&I rather than split it into £85,000 pots with different providers.”
