NS&I cuts rates on three-year bonds: here's how to earn a better rate

National Savings and Investments (NS&I) has cut the interest rate on its three-year bonds with immediate effect.

The rate on its three-year Guaranteed Growth Bond has dropped from 2.2% to 1.95%, while its Guaranteed Income Bond has fallen from paying 2.15% to 1.9%.

While the change will only affect new savers, it's a blow nonetheless – especially since NS&I products are always so popular.

The good news is that the cut comes at a time when other savings providers are hiking their rates, so you can easily switch to a more rewarding account.

In fact, there are even one year accounts that can match NS&I's new three-year deals, which is significant (as we'll elaborate on in a sec).

Why is NS&I cutting rates?

Since the Bank of England hiked the Base Rate of interest late last year, savings rates have been gradually increasing. They're still nowhere near inflation, mind, but the increase has been welcome nonetheless.

So why exactly is NS&I cutting rates at this point?

It says the bonds were proving very popular and, as a Government-backed bank, it has a target for how much money it can take in deposits.

As a result, it says it has cut the rate to reduce savers' interest in the accounts, so it doesn’t go over the target.

“NS&I was delighted to bring these highly popular Bonds back into the market at the start of December and demand for the Bonds in the first three months has been high,” says Jill Waters, retail director at NS&I.

“It is always a difficult decision to reduce rates but these changes will allow us to manage demand in order to achieve our Net Financing target, while continuing to deliver positive value to taxpayers.”

Any exceptions?

We should point out that anyone who already owns a three-year Growth Bond can resubscribe at the 2.2% rate. 

Likewise, holders of the three-year Pensioner Bonds have the option of switching to the aforementioned bond when their's matures.

Read: how to draw an income from your pension

Finally, the Investment Guaranteed Growth Bond (a different product altogether) still pays 2.2% and will remain on sale until 10 April 2018, but the most you can deposit is £3,000 and you can still get a better rate elsewhere.

Find the right savings account for you

So, where should you put your hard-earned cash?

There are several fixed-rate accounts paying more than 2% interest, including Ikano Bank (2.26%), Vanquis Bank (2.25%) and Masthaven (2.21%).

It's worth noting that, like traditional savings accounts, both the NS&I bonds are subject to tax (assuming you've already used up your tax-free savings allowance), meaning you can also beat the new interest levels with an ISA.

After tax the NS&I Guaranteed Growth Bond delivers 1.56% over three years, United Bank UK’s three-year ISA pays 1.87% tax-free.

I need a regular income

The drop in the rate on the Guaranteed Income Bond from 2.15% to 1.9% is a reason for savers looking for monthly income to look elsewhere.

Ikano Bank’s three-year bond pays 2.24% if you want to take your interest monthly. Meanwhile, Vanquis Bank’s three-year bond also has an option to take the interest monthly, with a rate of 2.23%.

Timing your fixed-rate savings account is key

You'll no doubt have been told numerous times – mainly by us! – that it's worth locking into a fixed-rate mortgage as the cost of borrowing is set to rise. Well, the opposite situation obviously applies when it comes to savings.

Lock in too soon to a five-year savings deal and you'll be kicking yourself when you see better rates cropping up all the time.

With further Base Rate hikes highly likely (the first being pencilled in for May), this means savings are probably going to continue rising. So while long-term rates undoubtedly offer the best rates, there is a risk involved.

That's why we mentioned the fact one-year savings accounts can currently match the NS&I bonds earlier in this article. Opting for a shorter fix now will see you bag a lower rate, but it could mean you're able to lock away at a better rate in a year's time.

Of course, none of this is a certainty. We are merely pointing out different strategies.

But, NS&I is so secure

Many people are attracted to NS&I because all deposits are 100% guaranteed thanks to the bank being backed by the Treasury. In contrast, deposits in other banks are only guaranteed up to £85,000 by the Financial Services Compensation Scheme.

However, NS&I’s only account still paying more than 2% interest – the Investment Guaranteed Growth Bond has a maximum deposit of £3,000. You can invest more elsewhere and still be fully protected.

The accounts that beat NS&I