What the end of NS&I 6.2% bond tells us about cash savings

The past year has been a golden period for anyone looking for interest on their cash, with savings rates beating inflation by the highest amount in years.¹

If you’re looking for the high-water mark of this savings boom, it may well have been issue 72 of the NS&I One-year Guaranteed Growth Bond, launched on 31 August last year which paid savers a stonking 6.2%. It was the highest rate the savings provider had ever offered for that type of bond, with the extra security offered by state-backed NS&I encouraging savers to deposit some £11.3bn into the bonds.²

A year on and the 6.2% rate has now expired. With interest rates generally falling the thousands of savers who bought the NS&I bond will need to find a new home for their money.

What options do they have? What are the prospects for cash savings returns from here? And what are the pros and cons of putting that money towards investments instead?

Where now for NS&I savers?

Anyone who put their money into the NS&I bond last year will have enjoyed a very healthy return in real terms (after inflation has been taken into account). While their money grew by 6.2% since last August, they felt inflation (measured by CPI) of just 2.2% in that time - a real return of 4%.³

It’s a long time since savers have had it that good. Even when interest rates shot up after the pandemic and war in Ukraine, it was in response to the very high inflation caused by those events so the high rates were mostly eroded away by price rises and real returns were actually modest. It is only since inflation has fallen to below savings rates this year that real returns have come through.

Unfortunately, the signs are that those real returns won’t be repeated in the coming year. Savings rates have been falling ever since the NS&I bond was issued last year and replacement bonds have been offered at lower rates. There are currently no one-year NS&I bonds on sale to new customers but those who held maturing one-year bonds have been offered replacements paying 4.75%. If you don’t already own a maturing bond, the best you can get from NS&I is a two-year bond paying 4.6%.

That’s still well head of inflation but a significant downgrade on the returns of the last year. Bear in mind, too, that these returns will be subject to tax. If your other income is £17,570 or more, you will pay tax at your usual rate of Income Tax on any interest you receive above your Personal Savings allowance. The allowance is £1,000 for basic rate-taxpayers, £500 for higher-rate taxpayers and zero for additional rate taxpayers.

Where next for savings rates?

Savings rates are ultimately set by savings providers in competition with each other, but these are closely influenced by the interest rate set by the Bank of England in response to rising and falling inflation.

The prices of assets which pay a fixed income, such as government bonds, can be used to work out where the market expects interest rates will be in the future. Right now the bond market is suggesting that the Bank Rate will fall from its current level of 5% to 4.1% in 18 months’ time. This is purely indicative - the reality is that the Bank of England tends to move rates in 0.25 percentage point increments.

The chart below shows the path for interest rates implied by bond market prices. The three lines each show the path implied on different days over the past few weeks. The fact that the path is getting lower as time passes suggests rates - including savings rates - will begin to fall more steeply from here.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. The value of shares in money market funds may be adversely affected by insolvency or other financial difficulties affecting any institution in which the fund's cash has been deposited. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.