NS&I Fixed Rate vs Fixed rate savings, pros and cons?

jungleboy123

So i have some spare monies built up doing nothing after maxing the cash ISA this tax year. Now seen the rates btwn NS&I and the next fixed rate for 1yr fix is very close.

Wanted to ask what the pros and cons were, apart from the obvious that NS&I is backed by the treasury so probably beats FSCS, but im nowhere near at/over FSCS limit.

Why would people choose NS&I over fixed rate if the banks are offering more %?

I think NS&I you can ask for money to be paid into bank each month or accumulate annually and be paid out (non compounded), but banks normally compound the interest maybe i got that wrong?

Others may have a similar question, so your response might help too.

Thx.

subjecttocontract

I think you have answered most of your questions yourself.

• No FSCS limits, so can save more than £120K with Gov backed guarantee.
• All fixed savings in one place, easier for own admin & future beneficiaries.
• Very good interest rates.
• Easy & quick to deal with online.

InvesterJones

https://forums.moneysavingexpert.com/discussion/6680948/ns-i-fixed-rate-vs-fixed-rate-savings-pros-and-cons

I think NS&I you can ask for money to be paid into bank each month
or accumulate annually and be paid out (non compounded), but banks
normally compound the interest maybe i got that wrong?

There's no inherent difference between NS&I and others here. You're right that any money paid out would no longer earn interest at NS&I, same goes for other banks which allow you to pay interest to a separate account. But any money in NS&I is compounding just like anything else.

StewedApple

Why would people choose NS&I over fixed rate if the banks are offering more %?

NS&I is state-owned. It has annual targets set by government for the amount of money it brings in. These targets are designed not to place it at an unfair advantage over commercial banking competitors - part of this management therefore is likely to see some of its products as less competitive than market-leaders.

As outlined above there may be other reasons than simply best interest rates motivating people to deposit with it - there can be tax advantages with some products, and for those who wish to rationalise their financial administration several accounts with the same organisation may be preferable to the highest rate on the high street.

jungleboy123

do you lose out on compound interest on the fixed products? I read they pay into a bank account, so i guess that would be non-compound vs a bank? or did i get this wrong?

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82115473#Comment_82115473

NS&I have Guaranteed Income Bonds which pay out the interest monthly. They have a lower interest rate than the Guaranteed Growth Bonds and presumably are used by people who want to spend the income as it arrives so compounding isn't a factor. But maybe they put that interest into an easy access account which has a better rate than the bond?

With the Guaranteed Growth Bonds you get the interest added to the bond annually (I don't think it gets paid out but I might be wrong - there is some language about how you can't touch the money until the bond has matured). So you don't miss out on compounding if you have a bond lasting more than a year.

One thing with the Guaranteed Growth Bonds (if you go for one lasting 2 years or more) is when you are taxed on the interest. It is all taxed on maturity. That may not be a good thing from a tax point of view. People will tell you it is how 2 year or longer bonds should be taxed with other providers but NS&I is one of the few providers who report your interest to HMRC all in one lump on maturity the others report it annually.

If I were going to get a Guaranteed Growth Bond then I would stick to a 1 year bond just to avoid the lumpiness of the taxable interest. Others may like it though.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/82115473#Comment_82115473

No you don't lose out. The money earns the same interest while it's at NS&I. Once it's not at NS&I then it depends what you do with it - you could put it in an account that earns more for example then overall you'd do better.

jungleboy123

https://forums.moneysavingexpert.com/discussion/comment/82115511#Comment_82115511

oh right… so in general banks reporting to HMRC over 1 year period would split tax across two tax years rather than NS&I?

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82116873#Comment_82116873

The submissions to HMRC are on an annual cycle aligned with tax years, so only include interest paid out during that tax year.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82116873#Comment_82116873

There are threads on here and the Cutting Tax board about this. I think the issue is that the bank or building society reports interest credited to your account during each tax year. They do it even if the account is a multi year fixed account which you can't access until maturity. They are legally required to do this - they aren't just doing it to confuse people. Strictly the interest on such an account should only be taxed at maturity (when you can access it) which is how NS&I describe it (and report it) for the Guaranteed Growth Bonds.

So if you have a GGB you will find HMRC taxing you on the whole interest over the multi years in the tax year of maturity. But if you have a 5 year fixed bond somewhere else you may find you get taxed on the interest each year it is credited because that is how the bank or building society reported it to HMRC. Some people don't like that and can get into a debate with HMRC over it Others who do self assessment just quietly report the interest in the correct way and usually don't get a query from HMRC.

Just to illustrate why you might not like the strictly correct approach imagine you are a basic rate tax payer and have no taxable interest except that from a 2 year fixed rate bond. Let's say in year 1 you get £500 interest on the account (you can't touch it yet) and then in year 2 you get £510 interest and the bond has matured so you can access it. If the interest is taxed separately in years 1 and 2 you are covered by the PSA so there is no tax to pay. If it is all lumped together and taxed in year 2 then you have gone over the PSA by £10 and have £2 tax to pay (or £2.20 next year). If that is you you may not thank NS&I for the way they report the interest even though it gets you to the strictly correct tax position.

Of course some people will tell you that if you just go with the flow on how most banks report the interest for such accounts then you are doing something wrong but of course that would require you to know what the strictly correct position was (and most people outside this forum don't).

Maybe I should say something like this message will self destruct 5 minutes after you have read it?

LHW99

Maybe I should say something like this message will self destruct 5 minutes after you have read it?

Well it'd certainly be Mission Impossible to make everyone happy 😉