National Savings and Investments (NS&I) has increased the interest rate on its fixed-rate three-year Green Savings Bonds to 4.73% as of yesterday, up from the previous 4.45%. These bonds are designed to support the government’s environmental initiatives by directing funds toward green projects. The current offer is available for new purchasers as well as those renewing their existing three-year bonds until November 13, 2023.

While the rate increase marks a significant rise from earlier rates this year, which started at 2.95%, the product may not appeal to savers primarily focused on maximizing returns. Competing fixed-rate savings products currently offer higher yields. For example, GB Bank provides a three-year bond paying 5.2%, and NS&I itself offers a three-year Guaranteed Growth Bond at 5.07%. The Green Savings Bond rate also falls below top rates from competitors, which have been over 6% in recent years.

Savers with a shorter time horizon may find one-year bond options more attractive given the ongoing volatility in interest rates and rising inflation pressures. NS&I’s one-year Guaranteed Growth Bond currently pays 4.99%. Other providers such as OakNorth Bank and Close Brothers offer rates around 5.1%, and GB Bank’s one-year bonds yield 5.11%.

The payment structure of the Green Savings Bonds may also affect their appeal. Interest accumulates annually but is paid out in a lump sum at the end of the three-year term. This means investors cannot withdraw interest during the bond’s duration and will receive the total interest payment in one tax year, potentially pushing them over their personal savings allowance.

Tax implications vary depending on the saver’s income bracket. Basic rate taxpayers benefit from a £1,000 annual personal savings allowance, while higher rate taxpayers have a £500 allowance, and additional rate taxpayers receive none. For a £10,000 investment in the 4.73% Green Savings Bond, the total interest earned over three years would be approximately £1,486. This sum exceeds the annual allowance, resulting in a tax charge on the amount above the threshold when payment is made.

Basic rate taxpayers could face tax of about £107 at the new 22% basic rate, reducing the effective return to around 4.6%. Higher rate taxpayers may pay up to 42% tax on the excess interest, lowering the net return closer to 3.6%. In contrast, bonds that pay interest annually allow savers to potentially utilize the personal savings allowance each year, avoiding or minimizing tax liability on interest earned.

Overall, the NS&I Green Savings Bonds offer an option for environmentally conscious investors seeking a fixed three-year product with government backing, but they may fall short compared to other savings products in terms of returns and tax efficiency. Savers should weigh the benefits against the alternatives available in the current interest rate environment.