Article posted: 05 September 2012

The days of penalty-free savings certificates are coming to an end.

National Savings & Investments (NS&I) finds itself in a strange position these days. Its remit from the Treasury for 2012/13 is simply to hang on to the cash it has – in other words, NS&I must balance any outflows with inflows, but overall raise no fresh capital. This might seem an odd directive coming from a Government that’s so deeply in the red, but the hard truth is that it is both cheaper and more efficient for Mr Osborne to raise the £166 billion he needs in this financial year by selling gilts to institutional investors. In late August, for example, the Treasury was able to sell almost £5 billion worth of a six-year gilt at an effective interest rate of under 0.8%.

One consequence, from NS&I’s perspective, is that National Savings Certificates (NSCs), Guaranteed Income Bonds and Guaranteed Growth Bonds will remain unavailable to new investors until at least next April. These fixed-rate investments are too popular, given NS&I’s funding objective. Nevertheless, in mid-August NS&I announced changes to the terms of all its fixed-rate products (including Children’s Bonus Bonds). These take effect for new investments (including re-investments of maturing certificates) from 20 September.

The most significant revisions were to NSCs, both fixed-rate and index-linked:

• There will be a 90-day interest penalty on encashment before maturity, whereas previously there had been none.
• For index-linked certificates, there will also be no index-linking for the year when the whole or part of a certificate is encashed.
• Interest (or, for index-linked certificates, the bonus) will be applied on a flat rate throughout the term, rather than the year-by-year escalating basis currently used.
• The minimum age for direct investment will rise from 7 to 16, although certificates can still be held under trust for minors.
• At maturity, a switch from one type of certificate to another will count towards your (£15,000) investment allowance for any new issue on sale.

These changes reduce the appeal of NSCs, particularly index-linked certificates. One point to watch if you have existing certificates is that, at maturity, they automatically reinvest on the new terms unless you choose to withdraw your money.