It's time to raise the rates

If he is serious about wanting National Savings & Investments to be 'the first port of call for people who have money to save or invest', Alan Cook - new chief executive at NS&I - will have to do more than promote the safe-as-houses attraction of being backed by HM Treasury. What would really make NS&I 'one of the best propositions for all savers and investors' would be better rates.

As far as the NS&I products which are directly comparable with what's available from other savings institutions go, the words 'market' and 'leading' are not the first that spring to mind. Ignoring the risible rate of 0.5 per cent paid on the NS&I (very) Ordinary Account, 'middling' is the best way to describe the rates it pays on its other variable-rate products. For instance, the 4.15 per cent you get with its Mini Cash Isa isn't the worst rate on the market but neither is it the best. The same is true of the 2.7 per cent paid on balances over £500 in its Investment Account and the 3.55 per cent with NS&I Income Bonds. But what about the products which are unique to NS&I?

Fixed Interest Savings Certificates


The return of 2.75 per cent on the two-year certificates and 3.05 per cent for those lasting five years may be tax-free but a basic-rate taxpayer could easily find a better return from a fixed-rate product where the interest is taxable.

The equivalent before-tax rate would have to be 3.44 per cent to match the two- year certificate and 3.81 per cent for the five-year version. A basic-rate taxpayer with at least £2,000 to invest would be better off with the 4.43 per cent paid on the two-year Fixed Term Deposit from the Co-operative Bank (0800 252 000) or the five-year fixed-rate bond paying 4.8 per cent from Birmingham Midshires (0800 169 1543) where the minimum investment is £1,000.

It's a different story for higher-rate taxpayers. For someone paying tax at 40 per cent, the equivalent before-tax rate on a taxed product would need to be 4.58 per cent to match the NS&I two-year certificate and 5.08 per cent to match the tax-free return of 3.05 per cent with the five-year fixed-interest certificate. None of the two- and five-year fixed-rate products on the market can match these rates which, for higher-rate taxpayers, makes both the issues of fixed-interest certificates from NS&I the market leaders.

Index-linked certificates


Because no other savings institutions offer products where the return is linked to the Retail Prices Index with a bit on top, according to Anna Bowes, Savings and Investments manager at independent financial advisers Chase de Vere, it's hard to say how good the two- and five-year NS&I index-linked certificates really are. But Bowes, who blows hot and cold about NS&I, says that because the return is tax-free, they can be worth considering as a small part of a higher-rate taxpayer's investment portfolio - but it depends on what happens to inflation.

If you assume target inflation of 2.5 per cent, index-linked certificates look a very good deal for higher-rate taxpayers. To match the tax-free inflation plus 1 per cent paid by the two-year certificate and the inflation plus 1.45 per cent on the five-year issue, an alternative savings product paying a taxed return would need to have before-tax rates of 5.83 per cent and 6.58 per cent respectively.

And they even look a reasonable deal for basic-rate taxpayers who would need a before-tax return of 4.38 per cent and 4.94 per cent to be able to match NS&I's two- and five-year inflation-proofed investments.

Guaranteed Equity Bond


Absolute security is the selling point of the NS&I stock market linked product which offers investors the chance to benefit from growth in the FTSE 100 Index, safe in the knowledge that whatever happens to the market, they will get all their money back. The third issue of the Guaranteed Equity Bond (which is no longer open to new customers) promises a maximum potential return of 65 per cent (before tax) of growth in the FTSE 100 over five years. Provided the index achieves that level of growth, this represents a yearly return of just under 11 per cent. To register your interest in the next issue of the NS&I Guaranteed Equity Bond, go to www.nsandi.com (where you can register online) or pick up a leaflet from your post office.