Martin Lewis: NS&I are cutting rates and this is what you should do about it

NS&I has announced that it’s cutting rates on many of its accounts in May. Martin Lewis detailed that these cuts will be particularly savage as millions of people have money in these accounts. The NS&I Direct Saver account will have its rate cut from one percent to 0.7 percent. It’s Income Bonds will fall from 1.15 percent to 0.7 percent.

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While these cuts will hinder many saver’s efforts, Mr Lewis detailed that there are options available. Martin said as a general rule savers should embrace being disloyal when it comes to savings and bank accounts.

People should shop around for the best rates and as he revealed the current top easy access accounts come from Marcus and Saga.

The easy access accounts from both these companies pay 1.3 percent AER.

Many may be attracted to NS&I products as they are provided by the government and are therefore safe places to put their money.

However, Martin Lewis detailed this is not a truly unique element for NS&I and therefore shouldn’t be the sole reason savers commit to them.

As he explained: “While many like to save with NS&I as they like they idea that it’s Government backed and 100 percent safe, the truth is all UK-regulated savings are protected up to £85,000 per person, per institution too.

“So as long as you’ve less than £85k savings in one account, your money is just as safe there.”

As mentioned previously, premium bonds are one of the main reasons people turn to NS&I, but the rates for the prizes here are also due to drop.

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They will go from 1.4 to 1.3 percent. The prizes can still be large enough to tempt people but Martin explained they may not be worth the effort: “The biggest boon was that the ‘prize’ money was tax-free but with the personal savings allowance – which means basic-rate taxpayers can earn £1,000 interest tax-free (higher-rate £500) 95 percent of savers don’t pay tax on savings interest anymore.

“The percentage is just a ‘prize rate’ – all it really means is for every £100 saved in Premium Bonds, £1.40 is paid out per year in prizes across all savers, dropping to £1.30 from May.

“Yet actually it doesn’t work like that, the smallest prize is £25 – so it’s all about the prize distribution.

“Just think for every £1m winner, lots of people get less. Indeed, someone with £1,000 in premium bonds with typical luck (based on the median average) you’re likely to win nowt.

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“In fact, with typical luck most people will win less than the prize rate, so easy access savings beat it.”

Despite this, Martin said the chance rates for winning the £1 million jackpot aren’t that awful, especially if people are able to hit the £50,000 maximum investment.

As he continued: “Where it does come into its own is if you’re one of the five percent of people who pay tax on interest (ie earn over £1,000 interest a year as a basic rate taxpayer, £500 as higher rate).

“Firstly, for this group, tax-free cash ISAs (top easy-access is Leeds BS at 1.3 percent) will likely beat normal savings and Premium Bonds, but if you’ve maxed your £20,000/yr ISA allowance, and you hold a lot of Premium Bonds, you’ve a decent chance of beating the returns you get from normal savings with bonds.”

According to NS&I themselves, the odds of winning for each £1 bond number held is 24,500 to one until the upcoming changes occur in April.

From May 2020, the odds will be 26,000 to one. As mentioned, the annual prize fund interest rate will drop from 1.4 to 1.3 percent but the remaining details will stay unchanged.

All prizes will remain tax-free, the minimum investment for premium bonds will remain at £25 and the maximum will still be £50,000.

It will also still be possible to withdraw from the monthly draws at any time and the minimum age for purchasing will continue to be 16.

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