NS&I ‘consumer exodus’: Savers withdrew £6.2bn amid rate cuts – how to ‘improve your lot’
Martin Lewis compares premium bonds to savings rates
NS&I announced interest rate reductions would take effect from November 24, 2020, with a number of variable and fixed rate savings accounts impacted. Among savings options impacted was the easy access Income Bonds product.
Previously, the AER for this account was a market-leading 1.16 percent, however it reduced to 0.01 percent AER on November 24, 2020.
Data released by the Bank of England today show savers withdrew £6.2billion from NS&I accounts in November.
Based on these figures, NS&I is now below its funding target for the year.
It has raised concern the government-backed savings provider may have “overegged the pudding” with its rate cuts.
Research conducted by AJ Bell in November found 43 percent of NS&I savers intended to move their cash elsewhere.
Laith Khalaf, financial analyst at AJ Bell: “There’s been a consumer exodus from NS&I, after it slashed interest rates on some of its most popular products.
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“Data from the Bank of England shows savers voted with their feet, and withdrew £6.2billion from NS&I in November alone.
“NS&I’s rate cuts happened at the back end of the month, on 24th November, so more cash may well have leaked out since.
“Indeed a survey conducted by AJ Bell found that 43 percent of NS&I savers were planning to move their cash out as a result of the rate cuts.
“The size of the outflows will be concerning for NS&I, as it has gone from being flush with cash to now finding itself below its £35billion funding target for the year.
“NS&I saw inflows of £38.3billion in the first six months of the financial year, from April to the end of September.
“But Bank of England data has shown withdrawals of £0.5billion, and £6.2billion in October and November respectively, which look like they leave around £31.6billion in the tank.
“That’s below NS&I’s £35billion target, though there is £5billion leeway either side, and NS&I still has until the end of March to make good any shortfall.
“In that time there will be some inflows through regular savings, which may help to offset withdrawals. ISA season is also just around the corner, when the end of tax year deadline serves to motivate savers to stick money in their tax shelters.
“However NS&I no longer offers an attractive rate of interest on its cash ISA, and with cash rates across the board so low, ISA savers may prefer stocks this year in any case.
“The scale of the withdrawals does raise the question whether NS&I has overegged the pudding with its rate cuts.
“It’s never an easy job deciding what rate will attract the right amount of money, but that’s been made even harder by the distortive effect of the pandemic on people’s savings habits. Over £150billion was saved into cash accounts in 2020, as options to spend money dried up with widespread social restrictions.
“That money was stashed away in cash despite interest rates falling to record low, and NS&I took in a load of it.”
Mr Khalaf went on to address changes which may have been seen by NS&I this year.
“The nature of NS&I’s customer base may also have shifted during 2020,” he said.
“Its savings accounts unusually found themselves near the top of the best buy tables after the pandemic hit, and banks and building societies slashed their rates.
“That kind of exposure attracts customers who shop around for the very best rates, and when things change, these savers can understandably be ruthless about moving on to the next best thing.
“It doesn’t look like it’s going to be a good year for cash savers, with markets pricing in base rate staying put, or even falling by the end of 2021, and inflation expected to rise.
“However, if NS&I continues to see such large withdrawals, it may yet raise rates before the end of the tax year. But even if it does, it probably won’t be back to the market leading levels we saw last year.”
Outside NS&I, in banks and building societies, households saved £17.6billion in cash accounts in November last year.
This was up from £12.7billion in October.
NS&I released some details about the January 2021 Premium Bonds winners today.
The first Premium Bonds millionaires this year come from West Scotland and Barnet.
Following the rate cuts, some savers may wonder what they should do regarding their savings.
According to AJ Bell, overall, the “best course of action” for NS&I savers depends on which kinds of products they have, and how much they value the security of having money backed by the Treasury.
“In terms of security, it’s worth bearing in mind that the Financial Services Compensation Scheme covers up to £85,000 of losses per person in the unlikely event of their bank going bust,” AJ Bell stated.
“Savers can improve their lot by shopping around for the best rate, and considering locking away some of their cash in fixed term bonds to harvest slightly higher rates of interest, if they don’t need instant access to their money.
“For longer term savings, five to ten years, investing in the stock market becomes a consideration.”
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