Why NS&I isn't a good home for your savings

Treasury backing and 100% security for your money might sound tempting, but that's all National Savings & Investments has got to offer.

What have Alan Sugar, Bob Geldof, Stephen Hawking and Germaine Greer all got in common?

No idea..? Do you give up..?

Well, they can all be seen on our TV screens in the latest National Savings and Investments (NS&I) advertising campaign.

But while NS&I might have got the thumbs up from these 'celebrity' endorsements, personally I'm less than impressed with the HM Treasury backed savings accounts.

There are three reasons why: Firstly, premium bond returns have been reduced again this month. Secondly, the rates on NS&I variable savings accounts have also been cut. And, finally the range of savings certificates which are linked to the retail prices index (RPI) are pretty useless now the index has dropped to 0% as of today!

Now I can't blame NS&I for trimming back the rates. After all, that goes hand-in-hand with a falling base rate. But since NS&I has attracted so many more savers with its promise of 100% security, I would like to see much better returns.

So, let's take at what NS&I has on offer right now. Here's a quick round-up:

Premium bonds

I have never really been keen on premium bonds as I explained in why premiums bonds don't make good savings accounts. They're ok for a bit of fun, but I don't think they really cut the mustard as a serious way to save.

The prize fund rate has recently been slashed from 1.8% to just 1%. This figure is the percentage of the total fund paid out to premium bond holders as prizes. And NS&I are such party poopers, they've also done away with one of top prizes, leaving just one remaining £1 million jackpot. The plan is to pay out a wider mix of prizes including a new £25 one that will allow more people to win.

But the odds of each bond winning are still tiny at 36,000 to 1. So, you can see the chances of getting a decent return are pretty slim, especially if you have only bought a few.

Index-linked savings certificates

Inflation watchers will know the RPI fell to 0% today. That means anyone with a savings accounts where returns are based on the RPI - or what's known as index-linking - will see their return fall.

NS&I index-linked savings certificates are designed to beat inflation (rising prices) with a rate of RPI + 1% over a three or five-year term. So, that means if you took out a certificate a year ago, you would have earned just 1% on your savings so far. At least the 1% rate over the RPI is fixed and the total return is tax-free, but that's not much consolation if you ask me.

You could argue as long as your savings beat inflation, it doesn't really matter what the RPI is. After all, your cash will still have the same purchasing power now as it did when the RPI was a lot higher.

That said, I think the RPI and the real rate of inflation we feel in our everyday lives are poles apart. Officially, prices of goods and services may be the same today as they were a year ago, but it still seems like everything I need to buy is getting more expensive. For that reason I'm after a better return than 1% on my savings, even if the RPI is zero.

NS&I variable rate accounts

NS&I have also cut back interest rates on a selection of variable savings accounts. The table below outlines the new rates:

As you can see some of these rates are pitiful, with the Investment Account offering a return which is less than the current base rate. The next table shows the less-than-competitive rates payable on some other NS&I products:

Where should you save your money instead?

As I'm sure you've realised by now I don't like NS&I, but what are the alternatives?

If you need a home for your easy access savings, how about Alliance & Leicester Online Issue 4 which pays a rate of 3% with no withdrawal penalties? This rate is a lot more generous than the 0.3% to 0.7% offered by NS&I's Easy Access Savings Account. What's more, A&L is owned by Santander - one of the largest banks in the world - and therefore would seem a reasonably safe bet.

If it's a fixed rate you're after, you won't go far wrong with ICICI Bank UK HiSave Fixed Rate Account which pays a return of 4.1% for a year. With NS&I's Fixed Interest Savings Certificates you'll have to lock your money away for longer, and earn significantly lower rates of 0.95% or 1.9%.

If you're looking for a tax-free return from Cash ISAs, I would rather go for the Golden ISA from Barclays which pays a rate of 3.61% (including a 1% bonus for 12 months), than take a rate of 0.5% or 1.3% available from NS&I's ISA accounts.

Right now, for every type of savings account, the best buy always beats what's available from NS&I. But,on a final note, I'll concede that if safety is your number one priority - and you're less concerned about the return on your cash - NS&I is probably still a decent choice for you. I think Alan Sugar would agree!

Compare all types of savings accounts at lovemoney.com

More: Why some savings accounts make me mad | Where to stash your cash in 2009