No tax - but you still get less interest

Good riddance to bad rubbish is probably the best that can be said about the closure of the (very) Ordinary Account from National Savings & Investments (NS&I), which stopped taking any new money on 31 July.

The rates the account paid - 1.1 per cent on balances up to £500 and 1.12 per cent on £500 and over - were derisory. But the Ordinary Account did have one redeeming feature: there was no tax to pay on the first £70 of interest earned (£140 for joint accounts).

However, that is no excuse for not moving your money elsewhere if you are one of the 12.7 million Ordinary Account holders who still have a total of £405 million invested in it.

For example, even after taking into account saving basic-rate tax of 20 per cent, the rate of 3.91 per cent (4.89 per cent before tax) earned by customers with a Savings Account from ING Direct (0800 376 7799), is three times as much as the tax-free interest earned on an NS&I Ordinary Account.

But what about other tax-free products from NS&I - should they, too, be consigned to the bin?

The 4.45 per cent paid on its mini-cash Isa is not exciting. A better bet is the Postal Isa from Abbey (0800 174635) which pays 5.35 per cent.

Looking at its fixed-interest savings certificates, basic-rate taxpayers would do well to give these a wide berth. The return of 3.35 per cent on the two-year certificates and 3.45 per cent for 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 4.19 per cent to match the two-year certificate and 4.31 per cent for the five-year version.

A basic-rate taxpayer with at least £500 to invest would be better off with the 5.95 per cent paid on the Fixed Rate Bond Issue 3 (which matures in just over two years in September 2006) from Newcastle building society (0845 606 5522) or with the five-year fixed-rate bond paying 6.05 per cent from MBNA Savings (0800 915 0512) where the minimum investment is £2,500.

It's the same story for higher-rate taxpayers looking for a two-year fixed-interest investment. Their before-tax rate would need to be 5.58 per cent to match the NS&I two-year certificate, which is bettered by the bond from Newcastle building society.

However, apart from MBNA Savings, none of the five-year bonds offers a better deal that NS&I.

Because no other savings institutions offer products where the return is linked to the Retail Prices Index with a bit on top, it's hard to say how good the two- and five-year NS&I index-linked certificates are. It all depends on what happens to inflation.

If you assume that price inflation continues at its current rate of 3 per cent, index-linked certificates look a good deal for higher-rate taxpayers.

To match the tax-free inflation plus 1.1 per cent paid by the three-year certificate and the inflation plus 1.25 per cent on the five-year issue, an alternative savings product paying a taxed return would need to have before-tax rates of 6.83 per cent and 7.08 per cent respectively.

They even look a reasonable deal for basic taxpayers, who would need a before-tax return of 5.13 per cent and 5.31 per cent to match them.