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NS&I to introduce stiffer withdrawal penalties

Saving | National Savings

By Justin Modray, published 15 August 2012.
Helpful? 19

National Savings & Investments is to introduce new withdrawal penalties on its Index-Linked and Fixed Interest Certificates along with Children's Bonus Bonds from 20 September 2012.

The penalty will be 90 day's loss of interest, plus no index-linking in the year of encashment for Index-Linked Certificates.

This change won't affect existing Certificates until maturity. But when a customer decides to roll over maturity proceeds into reinvestment Certificates the new penalty will kick in.

How does this compare to now?

Index-Linked Certificates
Now New
No interest if you withdraw during the first year. Thereafter you receive the last anniversary value plus the bonus and any positive index-linking for each month held since then, which is generous. 90 day's loss of interest and no index-linking in year of withdrawal. Potentially better in the first year but a higher penalty thereafter.
Fixed Interest Certificates
Now New
No interest if you withdraw during the first year. Thereafter the anniversary value is paid up to 3 months following that date, beyond that an extra 3/12th annual interest is paid for each complete 3 months held. 90 day's loss of interest. Potentially better in the first year but a higher penalty is likely thereafter.
Children's Bonus Bonds
Now New
No interest if you withdraw during the first year. Thereafter interest up until withdrawal. 90 day's loss of interest. Potentially better in the first year but higher penalty thereafter

Should I now avoid these products?

Both Index-Linked and fixed Rate Certificates are not currently on sale. But if they come back onto the market, or you roll-over maturity proceeds, the new withdrawal penalty is disappointing - more so for Index-Linked. While you shouldn't arguably invest in these Certificates unless you plan to hold until maturity, the ability to withdraw early with minimal penalty has been attractive in these uncertain times. I don't think the new penalty is sufficiently severe to justify avoiding Index-Linked Certificates altogether, but it will likely deter those attracted to the option of getting out early if inflation falls.

Children's Bonus Bonds have never been very competitive and I think it's rare for money to be withdrawn before maturity. So while the new penalty is largely more harsh, it'll make little difference in practice.

Any other changes?

Some good news. It will be possible view and manage all NS&I fixed term investments online for new investments made after 20 September. Shame this can't be extended to existing investments too.

Why is NS&I doing this?

Standardising withdrawal penalties across the range makes like simpler for everyone. But I also have a sneaking suspicion that a lot of people have been withdrawing Index-Linked Certificates early following recent inflationary falls, so perhaps NS&I is keen to deter this on future Index-Linked Certificate issues (that's if there are any...).

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Readers' Comments (2) - To post a comment please register or login .

Comment by Ray_Sun at 2:20pm on 11 Sep 2012:

Had you noticed that the new rules also prohibit children under 16 from reinvesting their Savings Certificates ? If people have given Certificates to their grandchildren as a long-term nest egg for when they get older they will now have to be cashed in when they mature. This means my grandchildren will all end up with different amounts of money and will have t open new accounts for the cash, which will be less 'locked-up' for when they're older. I'm really worried about this, and can't see why they're doing it. Does anyone else think this is a daft idea ?

Comment by rafferty at 2:26pm on 08 Mar 2013:

The latest certificates issues 23 and 50, available only to those rolling-over maturing certificates, are pretty stingy both paying just 0.25% interest plus RPI though might still look good to tax payers compared with other savings rates now on offer.

Perhaps it was partly in anticipation of the low interest rate to come that the old system of a slightly reduced rate being paid for early withdrawal was ended. Not much margin for staged rates at 0.25%.

If there's a brighter side it's that the penalty for early withdrawal under the new system can be minimal too. Losing 90 days interest at 0.25% amounts to only 0.0625% and if the withdrawal is timed for just after an anniversary there's minimal loss of index-linking. So need to decide at each anniversary whether to bail out or stay in for another year.