Competition in the savings market means customers are once again more interested in top rates than security

An increase in competition in the savings market could bring about more attractive rates for National Savings & Investments customers in the coming year, it emerged today.

The “flight to safety” which saw depositors flocking to the NS&I at the start of the global financial meltdown is over, the government-backed institution said, and it is now operating in a more “challenging” environment.

NS&I said it had seen gross inflows of £26bn in the year leading to March 2009, £10.5bn higher than in the previous year, as spooked savers took their money out of shaky high street banks and looked for a more secure home for it. Gross outflows, or the total of cash withdrawn, were far lower at £16.1bn.

Jane Platt, NS&I’s chief executive, said: “The global financial crisis meant that demand for our products increased dramatically despite us cancelling all discretionary marketing.”

The landscape is now changing, according to NS&I. In the first quarter of 2009-10, savers withdrew more cash than they deposited. Gross outflows stood at £4.5bn, while gross inflows were £3.2bn.

NS&I said competition had returned and savers had become more inclined to shop around on the basis of interest rates and product features rather than safety alone.

John Prout, director of sales and retention at NS&I, said: “We will have to look closely at our rates over the coming year.”

NS&I has to bring in £14bn of savings deposits during 2009-10 to meet its target for zero net financing, which refers to the difference between the deposits it receives and retains and the money paid out in prizes and interest. “We are not aiming to be top of the tables, but we will not be afraid of making some pricing decisions to bring in that £14bn,” Prout said.

The bond option

Away from National Savings, interest on fixed-rate bonds crept up this week, with Barnsley building society launching accounts that pay 5.4% for five years, 5.15% for four years and 5% for three years respectively.

The bonds can be opened in Barnsley branches or online with a minimum deposit of £100, up to a maximum of £500,000. The bonds offer a monthly or annual interest payment option, but withdrawals or early closure of an account are not allowed during the fixed-rate period.

Andrew Hagger of comparison site Moneynet said until now bond rates were too low to consider tying up money for more than two years, but he thinks the Barnsley rates are high enough to warrant locking up money for three years or more. “If you are still nervous about tying up your money for that long, you could try spreading it between different accounts so you have some maturing in three or five years’ time and some in a year.”

Rates on other types of accounts have not changed over the past few weeks. For savers wanting to use their Isa allowance, the highest tax-free fixed-rates on offer are from Principality building society, paying 4.2% for three years with a minimum deposit of £1, or the Halifax, paying 4% for four years, with a £500 minimum deposit. Standard Life is offering the highest paying instant access cash Isa, paying 2.65%. By comparison, NS&I is paying just 1.3% on its cash Isa.

Hagger recommended the Alliance & Leicester Online Saver Issue 5, paying 3.15% including a variable bonus of at least 1.65% until August next year, for those wanting almost instant access to their cash. The account allows access to your money within 24 hours if transferred to an Alliance & Leicester current account or up to four working days if transferred to another bank.

Instant access rates excluding bonuses look very low in comparison: the best rate available online for a minimum deposit of £1 is 2.5% from the Barnsley and Newcastle building societies, but this is still better than NS&I’s and its easy access account, which pays between 0.3% and 0.7% gross.

However savers with £25,000 or more to deposit who are unwilling to shop around constantly for the best rates can get a consistently competitive rate from Investec Private Bank, whose High 5 Account pays the average of the five highest gross rates published on the Moneyfacts website. The rate is updated weekly and now stands at 3.17%. Withdrawals are subject to three months’ notice.