My feeling is that National Savings and Investments (NS&I) will either have to increase the prize money for premium bonds or launch an attractive new product this year to attract savings.
That’s because it has unveiled details of its new UK savings bond, which was announced to great fanfare in the spring budget.
And it turns out to be a devious bond: nothing more than another three-year bond with a mediocre interest rate.
As I predicted, the Guaranteed Growth Bonds and the Guaranteed Income Bonds went on sale in the first week of April at an interest rate of 4.15 percent per annum, or 4.07 percent if you want your interest paid every month.
Industry insiders tell me that NS&I could face difficulties in encouraging savers into these new bonds.
Bestseller: NS&I’s new UK savings bond is nothing more than another three-year bond with a mediocre interest rate, so will it now offer a better price on Premium Bonds?
For starters, three-year bonds are generally unpopular. Almost all savers prefer easily accessible accounts or bonds with a term of one year.
For example, three-year deals represent just half a percent of the money going into Hargreaves Lansdown’s savings platform, as savers want easy access and shorter-term bonds.
If savers don’t buy these British savings bonds, NS&I will have to do something else to interest us in its products.
That’s why I think more prizes for Premium Bond holders, the best-seller, are planned. Let’s hope it will also mean more for Isa savers. All NS&I has to offer is the easily accessible Direct Isa for a paltry 3 per cent.
The government-backed bank still has a lot of work to do when it comes to attracting savers.
The Treasury wants it to raise £9 billion (in a range of £5 billion to £13 billion) of new money in the current financial year. It also needs to hold on to the money currently in its popular one-year bond, which matures later this year.
If NS&I does not come up with a competitive replacement, that money could fly out the window, causing NS&I to fail to achieve its target.
Although yields on UK bonds are lower than other bonds on the market, I still think some savers will be tempted. That’s because you can invest between £500 and £1 million and it’s all guaranteed by the government.
This makes the bonds popular with wealthy savers, as banks and building societies will cover less than £85,000 of savings as part of the Financial Services Compensation Scheme (FSCS), so you can put all your money with NS&I rather than having to spread it out. around numerous providers and keep an eye on several accounts.
But if you do choose the British savings bonds, pay attention to the taxes. Because of the way they are structured, you don’t have to save much before you risk getting a tax bill.
Flexible Isa rules will help savers
The new tax year started last Saturday, meaning we received a new Isa allowance.
You can put another £20,000 into an Isa savings account and all your interest will automatically be tax-free.
You can use this allowance until April 5 next year.
New rules, which came into effect on April 6, mean you can now open more than one cash Isa per tax year. This allows you to split your money between fixed rate Isas and easy access Isas, as long as your provider allows this.
It means that if you open an Isa now with part of your allowance, you can open another Isa later in the year.
It’s still your responsibility to ensure you don’t pay more than £20,000 into Isas during the tax year.
Sy.morris@dailymail.co.uk