Treasury rates are safe but not sound

It was set up by the Palmerston government in 1861 as a simple savings scheme to encourage wage earners 'to provide for themselves against adversity and ill-health'. Today, National Savings - as the Post Office Savings Bank is now known - is the UK's second-largest savings institution, with more than 30 million customers, saving £62 billion. So what makes National Savings so popular?

Perhaps it's that the 140-year-old institution is backed by HM Treasury, so money invested is 100 per cent safe. For many savers it may be the natural choice at a time when the world is threatened by conflict. But the poor rates paid mean many savers could be much better off elsewhere.

A downward slide

Down from 1.1 per cent, the maximum 0.85 per cent paid on National Savings' no-notice Ordinary Account is derisory. The first £70 of interest (£140 for accounts in joint names) may be tax free - but it needs to be.

With rates of between 3.5 per cent and 4.7 per cent (depending on the size of balance), the Investment Account is better, but you have to give 30 days' notice of withdrawals. Savers could easily improve on interest rates and access with an Instant Transfer account from Scottish Widows Bank (0845 845 0829) - a no-notice account that pays 4.8 per cent from £100 rising to 5.05 per cent on £50,000+.

Almost as good is the Direct Access account from Intelligent Finance (0845 609 4343), which pays from 5.01 per cent on £100 to 5.3 per cent on £100,000. Savers with at least £2,000 can earn 5 per cent with the CallSave Instant account from Coventry building society - 0845 766 5522. Fans of internet banking will do better, with 5.25 per cent on the Halifax Web Saver account.

The 5.2 per cent on a National Savings Isa isn't bad, but for a tax-free cash mini Isa, with a month's notice of withdrawals, investors would be better off with Northern Rock (0845 601 5151) which pays 6.05 per cent (due to go down to 5.8 per cent from 1 October). A no-notice Isa from internet bank Smile pays 5.5 per cent while the Isa from Chelsea building society (0800 132351) pays 5.65 per cent.

In a fix


If you don't need ready access to your cash and you want a guaranteed rate of interest, National Savings offer s the Capital Bonds, Fixed Rate Savings Bonds and the tax-free Fixed Interest Savings Certificates.

If you have less than £1,000 to invest, the five-year Capital Bond - which guarantees a compound rate of 5.05 per cent - is a good deal. But if you can invest a minimum of £1,000 over five years, the Capital Millennium Bond from Julian Hodge Bank (0800 028 3746) pays 5.65 per cent.

If you have at least £1,000, you can earn 5.25 per cent over one-year in the internet-based e-Bond from Abbey National.

However, if you have £50,000 to spare, National Savings' six-month Savings Bond is on a par with the best fixed-rate products in the market.

Even though the return is tax-free, the same cannot be said of the two- and five-year Savings Certificates, which pay 3.55 per cent and 3.65 per cent. A basic-rate taxpayer could easily find a better return from a fixed-rate product where the interest is not tax free. But National Savings Certificates look pretty competitive if you pay tax at 40 per cent.

Of interest for income?


When it comes to income-paying products - all of which are taxable - National Savings fails to excite. From 5 October only 4.6 per cent is paid on lump sums up to £25,000 (4.85 per cent over £25,000) by National Savings Income Bonds. The 60-day-notice Bonus Bond 17 from Scarborough building society (0845 458 4458), which like Income Bonds pays interest monthly, has a rate of 5.3 per cent. On balances over £2,500, so does the 90-day RateSafe account from MBNA Europe Bank (0800 336262).

According to adviser Baronworth, taxpayers who are over 60 and have at least £5,000 to invest should avoid National Savings' one-, two- and five-year Pension ers Bonds like the plague. These pay rates after basic-rate tax of 3.84 per cent, 3.92 per cent and 4 per cent respectively. Assuming an investment of £15,000, a Guaranteed Monthly Income Bond from insurer AIG Life over two years would pay 4.15 per cent after tax and a five-year bond from Countrywide would pay 4.55 per cent. However, insurance-based Guaranteed Income Bonds are not suitable for non-taxpayers because tax deducted cannot be reclaimed.

Beyond compare


There are no products to compare with National Savings' two- and five-year Index-linked Savings Certificates, which guarantee to match inflation with a bit on top.

Like the fixed-interest certificates, the tax-free return can be of particular interest to higher-rate taxpayers.

Assuming inflation averages 2.5 per cent, a savings product paying a taxed return would need to have before-tax rates of 7.5 per cent and 7.33 per cent to match the tax-free inflation plus 2 per cent paid by the two-year certificate and the inflation-plus-1.9 per cent on the current five-year issue.

The attraction of Premium Bonds - which account for a quarter of the money invested with National Savings - needs no explanation.

After all, where else can you buy the possibility of becoming a millionaire safe in the knowledge that if you get bored of waiting, you can always get your money back?