NS&I Green Savings Bond Rate Increase Falls Short of Competitors

National Savings and Investments (NS&I) has raised the interest rate on its fixed three-year Green Savings Bonds to 4.73%, up from the previous 4.45%. This updated rate applies to new savers and those renewing their existing three-year bonds.

While the Green Savings Bonds support the government's environmental initiatives, the new rate falls short of what is available from other savings providers. For instance, GB Bank offers 5.2% interest, and NS&I's own three-year Guaranteed Growth Bond pays 5.07%.

The decision to lock money away for three years may be considered risky given the current volatility in interest rates and ongoing concerns about inflation. Historically, the best rate offered on Green Savings Bonds over their five-year tenure was 5.7%, while competitors offered rates slightly above 6%.

Savers who were invested in the current issue of Green Savings Bonds, available between August 22 and November 13, 2023, may see a reduction in returns if they reinvest at the new rate. A further consideration is taxation. NS&I accrues interest annually but does not disburse it until the bond's maturity after three years. This means savers can only utilize one year's personal savings allowance to offset tax.

For basic rate taxpayers, who can earn up to £1,000 in interest annually tax-free on ordinary savings accounts, investing £10,000 in the Green Savings Bond at 4.73% would yield £1,486 over three years. This amount would exceed the personal savings allowance. After paying tax at the new 22% rate on the excess £486, the net interest would be approximately £380, effectively reducing the overall return to around 4.6%.

Higher rate taxpayers, with a £500 annual allowance, would face a 42% tax rate on the interest exceeding their allowance, significantly decreasing their net return to about 3.6%. In contrast, accounts like GB Bank, which allow annual access to interest, enable savers to utilize their personal savings allowance for each of the three years.

Even for shorter terms, better rates are available. NS&I's one-year Guaranteed Growth Bond offers 4.99%, while OakNorth Bank and Close Brothers provide 5.12%, and GB Bank offers 5.11%.