What the end of NS&I 6.2% bond tells us about cash savings

The past year has been a golden period for anyone looking for interest on their cash, with savings rates beating inflation by the highest amount in years.¹

The high-water mark of this savings boom may well have been issue 72 of the NS&I One-year Guaranteed Growth Bond, launched on 31 August last year and paying savers 6.2%. It was the highest rate the savings provider had ever offered for that type of bond, with the extra security offered by state-backed NS&I encouraging savers to deposit some £11.3bn into the bonds.²

A year on and the 6.2% rate has now expired. With interest rates generally falling, the thousands of savers who bought the NS&I bond will need to find a new home for their money.

What options do they have and what are the prospects for cash savings returns from here?

Where now for NS&I savers?

Anyone who put their money into the NS&I bond last year will have enjoyed a very healthy real return. While their money grew by 6.2% since last August, inflation (measured by CPI) was just 2.2% over that time — a real return of 4%.³

It’s a long time since savers have had it that good and these real returns are unlikely to be repeated in the coming year. Savings rates have been falling ever since the NS&I bond was issued last year and replacement bonds have been offered at lower rates. There are currently no one-year NS&I bonds on sale to new customers but those who held maturing one-year bonds have been offered replacements paying 4.75%.

If someone doesn’t already own a maturing bond, the best they can get from NS&I is a two-year bond paying 4.6%. That’s still well head of inflation but a significant downgrade on the returns of the last year. The returns will be subject to tax too.

Where next for savings rates?

Savings rates are, of course, ultimately set by savings providers but these are obviously closely influenced by the interest rate set by the Bank of England in response to rising and falling inflation.

The prices of fixed income assets, such as government bonds, can give an indication of where the market expects interest rates will be in the future. Right now, the bond market is suggesting that the Bank Rate will fall from its current level of 5% to 4.1% in 18 months’ time, although this is purely indicative.

The chart below shows the path for interest rates implied by bond market prices. The three lines each show the path implied on different days over the past few weeks. The fact that the path is getting lower as time passes suggests rates - including savings rates - will begin to fall more steeply from here.

Clients looking for a new home for their cash investments?

With interest rates now beginning to fall – and with more cuts predicted in the near future – many individuals may be considering where to put this money once it becomes available.

If you have clients in this position, our platform has many options for reinvestment – whether they’re seeking growth, income or a combination of the two. What’s more, we have a range of cash accounts paying competitive returns if they prefer to keep this money out of the markets.

The Fidelity ISA

An ISA has always been one of the best ways to invest money with clients able to shelter £20,000 each tax year. As you will know, no income or capital gains tax is paid on the returns generated.

There are over 7,000 investment options on our platform with choices to suit all risk profiles. You can pick from funds (including cash and multi-asset investments), individual equities, exchanged traded funds and Investment Trusts.

More about our ISA

The Fidelity Pension

While you won’t need reminding, it’s worth reiterating that pensions are one of the most tax-efficient ways for clients to save for retirement. In addition to the tax relief given on contributions, investments grow free of both income and capital gains tax. The annual allowance is currently set at £60,000 for most individuals and potentially more can be invested if carry forward is available.

Our pension is designed to offer value, choice and options at retirement with all the flexibility clients need, including death benefit planning, and an extensive range of investment options (including a smoothed pension fund outlined below). In total, over 7,000 investments are available on the platform.

More about our Pension

An innovative smoothed solution available for pension investors

This innovative new retirement savings and decumulation option is designed for clients who are seeking less short-term volatility from their pension investment as they navigate to, and through, retirement. The fund can be held alongside other investments within our Pension.

This multi-asset solution features a smoothing overlay that dampens day-to-day volatility – the underlying fund’s price changes daily in line with an Estimated Growth Rate. It enables clients to participate in a growth strategy knowing they don’t have to worry about some of the effects of the short-term ups and downs experienced with markets.

More about the Smoothed Pension Fund

Cash options

At Fidelity, we offer cash accounts – both within and outside of product wrappers – as well as cash funds. We have a number of options to help you implement a cash investment strategy and build and retain your clients' assets on the platform. Cash options are also available within model portfolios.

More on our cash options and current interest rates

If clients are looking to reinvest maturing cash deposits, simply visit our website for more information on the investment choices available on our platform. Our ‘Investment Finder tool can help you sort through all the options, if required.

Source:

¹ Fidelity International, Office for National Statistics, Bank of England, June 2024
² Savings Champion, 1 August 2024
³ Office for National Statistics, consumer price inflation, July 2024