NS&I faces dilemma as 1.8% rate for Green Savings Bonds to cost taxpayers £210m each year

Martin Lewis offers advice on reinvesting in NS&I bonds

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NS&I will be launching a Green Savings Bonds by the end of this year and while full details of the product have yet to be released, new evidence has emerged which shows savers and investors are keen to take advantage of these kinds of sustainable options. Today, HM Treasury confirmed billions were raised for “green projects” as the Government launched its first ever Green Gilt, which Rishi Sunak welcomed as a key step in tackling a range of environmental challenges. However, additional analysis of this news showed if the interest rates on NS&I’s green bond fails to reach a certain threshold, taxpayers could be hit with drastic costs.

According to the Government, £10billion was raised from the sale of the UK’s first ever Green Gilt this morning, the largest inaugural green issuance by any sovereign, with the largest ever order book for a sovereign green transaction. A second issuance will be issued later in the year following this and HM Treasury detailed Green Gilts will raise a minimum of £15billion for green Government projects like zero-emissions buses, offshore wind and schemes to decarbonise homes and buildings in this financial year.

Rishi Sunak commented: “Green finance is vital in helping us to tackle the environmental challenges we face, and the launch of our first green bond is a signal that the UK continues to be a world leader in this area.

“This funding will be used to finance vital green Government projects across the country, including things like clean transportation, renewable energy and preserving our natural environment. In helping us to build back better and greener, it will also help to create jobs as we transition to net zero.”

Demand for this gilt remained incredibly high as while £10billion was sold, reports suggest over £100billion of bids were received.

While the Government has just £5billion more of UK green gilt issuances is planned this year, but NS&I is planning to issue £15billion of its own green bonds to retail savers by the end of 2021.

While this is likely to also draw similar levels of interest, taxpayers could be hit with high costs as a result of the demand.

Laith Khalaf, head of investment analysis at AJ Bell, explained: “The new guilt-free gilt has been a huge hit, with institutional investors jostling to get a slice of the action. Bonds are already in high demand, thanks to the presence of a price insensitive buyer in the form of the Bank of England, as well as regulations which encourage pension schemes and insurance companies to hold gilts. Add in a green tint which can help pension trustees bolster their ESG credentials, and you have a very potent sales mix indeed. The fact there’s also so little supply has also no doubt helped to put bums on seats. Just £15billion of green gilts are planned this year, a drop in the ocean compared to the £250billion of bonds the Government intends to issue this fiscal year.

“The Government will also be tapping up retail savers for green funds too, through the £15billion issuance of the NS&I Green Savings bond, which will be a three year fixed term product. In theory there should be a good deal of demand for the NS&I bond, given its green credentials and Treasury backing. However, with cash rates so low, savers will be keen to make sure they’re getting a competitive rate, as well as satisfying their environmental concerns.

“That creates an uncomfortable friction for the Chancellor, between giving savers a decent rate, and providing value for money for the taxpayer. The best three year cash rates currently stand around 1.8 percent, yet the government can borrow money on the conventional gilt market at under 0.4 percent for three years, which it can then invest in green projects if it wishes.

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“If NS&I issue their £15billion green bond with a market leading rate of 1.8 percent, that would cost the taxpayer around £210million a year, at a time when Exchequer coffers have been drained by the costs of the pandemic. On the flip side, issuing a three year bond at the gilt yield of 0.4 percent is likely to see many savers turn a blind eye to the green savings bond when much more attractive rates are available on the market.

“There will be questions of course about whether these green financing initiatives are entirely necessary, seeing as the government could simply raise money through conventional gilts and NS&I accounts to fund their green spending priorities. That may well be the case, but these green products do at least provide an environmentally friendly option to savers and investors who want to do their bit, and would like to see their money put to good use.”

NS&I has confirmed its green bonds will be set at a fixed term of three years, and these will be designed to be held for the whole term. However, a “cooling-off period” will be applicable for the first 30 days of investment.

Earlier this week, Mr Khalaf expanded on how important the interest rate on offer for the green bond will be for savers.

“The new NS&I bond the Chancellor is planning will give savers the option of a green home for their cash, but its success will likely be determined by the interest rate on offer,” he said.

“Savers showed they’re willing to vote with their feet when NS&I cut interest rates across a swathe of accounts last November, and if the green savings bond offers a paltry rate of interest, it might fail to ignite demand from the public.

“On the flip side, if the interest rate is too high, it will raise questions about the cost to the taxpayer, because the green savings bond is ultimately just Government borrowing by another name.

“Savers won’t be investing directly in renewable energy projects, rather they’ll be lending money to the Government to do so, in return for interest on their money.”

In late August, it was confirmed Britons withdrew around £13billion from NS&I between April and June 2021. More than double the £6.1billion taken out in 2020.

NS&I addressed this at the time: “The impact of the interest rate reductions made by NS&I towards the end of 2020 has continued to be reflected in the volume of outflows NS&I experienced in Q1 2021-22, while the opening up of the economy has also had an effect on savers’ behaviour.”

Currently, NS&I offers the following interest rates on its range of savings products:

  • Premium Bonds: One percent annual prize fund rate
  • Junior ISA: 1.5 percent
  • Income Bonds: 0.01 percent
  • Direct ISA: 0.1 percent
  • Direct Saver 0.15 percent
  • Investment Account: 0.01 percent

Ian Ackerley, NS&I Chief Executive, addressed the company’s cuts in September 2020: “Reducing interest rates is always a difficult decision. In April we cancelled interest rate reductions announced in February and scheduled for May 1.

“Given successive reductions in the Bank of England base rate in March, and subsequent reductions in interest rates by other providers, several of our products have become ‘best buy’ and we have experienced extremely high demand as a consequence.

“It is important that we strike a balance between the interests of savers, taxpayers and the broader financial services sector; and it is time for NS&I to return to a more normal competitive position for our products.”

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