Thousands of NS&I savers get the chance to redeem their fixed-income bonds early without penalty
Thousands of NS&I savers have had the opportunity to redeem their fixed-income bonds early without penalty.
Government bond-backed NS&I had to write to savers after failing to tell them that changes to the terms of its Guaranteed Growth Bonds in 2019 could mean a high tax bill.
The bonds are no longer for sale generally, but those who already own them can convert them into a new bond with a maturity of one to five years.
Muddle: NS&I admits ‘it could have been clearer’ when explaining the tax treatment of the bonds
Before May 2019, savers could access their money early if they paid a fee equal to 90 days of interest. Any tax due on interest added to their accounts would be paid every year. But a rule change two years ago meant that savers who bought or renew their bonds could no longer access their money early, which changed when interest was taxed.
Although interest is credited to an account annually on bonds purchased from 1 May 2019, it is only taxable when the bond matures. This could mean that some savers risk exceeding their annual personal savings of £1,000 for base rate taxpayers and £500 for senior taxpayers.
Tax is due on the earned savings interest above these amounts. Additional fare payers will not receive a supplement.
A three-year bond closing in May 2019 will pay 1.95 percent pre-tax – £597 for each £10,000 investment. With all the interest lumped together in one tax year, higher rate earners will lose their £500 personal savings in the April 2022/April 2023 tax year.
Base rate taxpayers face a bill if the interest on savings elsewhere outside an Isa exceeds £403 in that tax year. And those who have £20,000 in the bond will earn more than their £1,000 in savings.
On the five-year 2.25 percent bond, savers will receive £1,177 interest on every £10,000 at maturity. Still, it took NS&I four months after the May 2019 rule change to tell savers how they would be taxed. Many only became aware of the changes in April of this year when tax risk was mentioned in their financial statements.
NS&I admits that ‘it could have been clearer’ when explaining the tax treatment of the bonds.
Since then, it has given 14,400 customers who renew their Guaranteed Growth Bonds between May 2019 and September 2019 the chance to redeem them penalty-free. But they only had 30 days to make a decision after the NS&I letter was sent on June 15. Savers who did not respond at the time missed the boat and could get a tax bill.
Taking cash isn’t always the right option, as lower rates elsewhere could mean base rate taxpayers are better off with bonds.