State bank NS&I ups savings rates for second time in two months, in a bid to halt customer exodus and avoid falling drastically short of fundraising target

  • NS&I is upping rates on its Income Bonds, Direct Saver and Direct Isa to 0.35%
  • It is hoping the improved rates will enable it to hit its £6billion fundraising target
  • The company had already raised 10% halfway through its fiscal year.  
  • However, the rates remain far below the most competitive deals available on the market.  
  • Experts believe they won’t win many savers 

State-owned savings bank NS&I is increasing the interest rates on some of its savings accounts for the second time in two months in a bid to halt an exodus of customers. 

Last month, NS&I upped the rate on its Direct Saver and Income Bonds from 0.01 per cent to 0.15 per cent and on its Direct Isa from 0.01 to 0.10 per cent.

As of 29 December, rates on the first two deals will rise once more from 0.15 per cent to 0.35 per cent, whilst the interest rate on its Direct Isa will increase from 0.10 per cent to 0.35 per cent. 

NS&I is on track to fall short of its annual fundraising target this financial year and is upping its rates in a bid to attract more customers.

NS&I is on track to fall short of its annual fundraising target this financial year and is upping its rates in a bid to attract more customers.

NS&I will be hoping its improved rates will help it to hit its £6billion target for this financial year.

But that’s a huge task. Between 1 April and 30 September this year, NS&I savers deposited a net £600million, 10 per cent of its target. 

It was also far below the £38.3 billion deposited during the same period last year.

The £22.8billion in gross outflows record by NS&I between April and September this year suggest that customers are withdrawing their cash in droves.    

James Blower is a founder of Savings Guru and doubts that this move will make the desired impact.

‘It’s no surprise to see NS&I announcing another interest rate increase,’ says Blower.

‘It’s clear from their quarterly updates that, although Premium Bonds remain popular, billions continue to flow out of NS&I’s other accounts.

“Last month’s 0.15 percent increase was an attempt to stop the exodus, but it wasn’t enough.

‘I don’t think these increases will be enough to stem the outflow which is good news for Premium Bonds holders, as this reduces the likelihood they will see rate cuts, and is likely to mean that NS&I will have to improve rates further to keep on track for its Net Financing Target.’

The new offer may tempt some savers.

High Street Banks offer easy access to interest
Barclays 0.01% 
Halifax  0.01% 
Lloyds  0.01% 
HSBC  0.01% 
BS National 0.01% 
NatWest  0.01% 
Santander   0.01% 
TSB  0.02% 
Metro  0.05% 

NS&I is clearly hopeful of attracting savers to its Treasury-backed savings deals, particularly given the fact that many savers are earning as little as 0.01 per cent with the big banks.

However, whilst it may hope to steal savers away from the big banks, NS&I’s new and improved rates remain far short of the best savings deals on the market.

The lowest-cost easy-access deal is currently 0.71 percent; the highest one-year fixed-rate deal pays 1.41 percent; while the highest easy-access cash deal Isa pays 0.67per cent.

Andrew Hagger, founder of MoneyComms, believes NS&I’s rate increase should act as a wake up call to savers to abandon high street banks paying next to nothing and move elsewhere — just not necessarily to NS&I.

Hagger says: ‘NS&I’s Direct Saver is a much better deal than those offered by the high street banks, however, the current easy access best buys are still a more rewarding home for your “rainy day” or emergency cash balance — paying double the NS&I new rate.

I recommend saving money now, not waiting for the bank to raise their average savings rate.

“Instead of using this as a wake-up call, find an easier savings option that pays up to seventy percent as much and use it as such.

Type of account                   Taxes 0% 20% Tax 40 percent tax
1 YEAR                         
Gatehouse Bank (£1,000+) (3)                    1.41 1.13 0.85
Zopa Bank (£1,000+)                    1.37 1.10 0.82
Investec (£5,000)                    1.36 1.09 0.82
TWO YEARS                  
Zopa Bank (£1,000)                    1.61 1.29 0.97
Gatehouse Bank (£1,000+) (3)                    1.60 1.28 0.96 
Paragon Bank (£1,000+)                    1.60 1.28 0.96

Aside from the rates, NS&I may be hoping that its reputation and the fact that its customers savings are fully backed by the Treasury will be sufficient to draw people in.

However, there are also those that feel NS&I’s reputation has been severely damaged by its brutal rate cut last November. 

Direct Saver went from 1 percent to 0.15 %, income bonds fell from 1.15 – 0.01 %, and Direct Isa dropped from 0.9 – 0.1 %.

Blower says: “Many savers feel bitterly disappointed by being lured in, and then subjected to abject service or savage rates cuts in November 2020.

‘NS&I has done long-term damage to its reputation by the whole handling of the situation – from the decision to cancel proposed cuts for May 2020, to the severity of the cuts it announced in September 2020 and implemented in November 2020 – and its subsequent inability to resource appropriately for the inevitable increase in customer activity that would create.

The most worrying thing is that the whole situation seemed shocking to the management, when anyone with any knowledge of the savings industry would have been able to tell them what their consequences would be.

“Their service is still terrible. This can be seen in Trustpilot’s horrible feedback and ratings.

“My advice for savers: If you don’t have your savings, move it out. There are better rates and services elsewhere.