Green Savings Bond at 4.2%: the best ethical savings?

The rate has finally been improved for the NS&I green bond.

The latest hike brings the return to 4.2% for the three-year fixed bond, which is only a little behind other fixes for a similar period.

So if you want your money to do good, is this a decent option?

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What is the Green Savings Bond?

The bond is provided by National Savings & Investments (NS&I) with the aim of getting us to lend money to the government for green public spending.

You can deposit up to £100,000 into the bonds which will be then locked away for three years. You’ll get an interest rate of 4.2% fixed for that time.

You get protection up to the full £100,000, so that’s more than the FSCS limit of £85,000.

Only new applicants will get this rate. If you’ve previously invested savings in these bonds you’ll get the rate offered at the time – which at one point was as low as 0.65%.

Is the Green Savings Bond any good?

If you’re looking just at the rate, then it’s finally competitive. Previous issues of the account have been pretty rubbish when compared to alternatives.

But it can be still beaten. The best three-year account at the time of writing is Gatehouse at 4.45%, while you’re looking at 4.35% from Close Brothers for a two-year fix. There’s also 5.12% available on up to £5,000 via Barclays (see more on these and other top rates here).

So what does that actually mean in terms of your actual return? With the Green Bonds, for every £1,000 saved in the account, you’ll earn £42 a year. But the best account for the same three-year period will earn you £44.50 a year. So that’s only a difference of £7.50 less over the three years (not accounting for compounding).

Of course, the more you save, the bigger the difference. Save £10,000 and you’re losing out on £75 over three years. Put in the full £100,000 and it’s £750 less via the Green Bonds across the entire term.

So for smaller amounts, it’s relatively negligible, and even on larger amounts you might decide to take a hit on your return in order to have ethical savings.

How much tax will you pay?

Green Bonds are not tax-free, so you’ll be subject to tax on any earnings outside your personal savings allowance (PSA).

It’s worth noting that you won’t get the interest until the entire bond matures in three years. That means your interest lump sum could be sizeable.

Saving £8,000 in the bonds will earn you £336 a year, so that’ll be more than £1,000 at maturity. And not only will you pay tax on the interest over your PSA, you’ll also be paying it on any interest you earn from other accounts that payout in that year.

How ethical are Green Savings Bonds?

Lots of people will be attracted to the account because of ethical concerns. They want their money to do good, not bad (as your money could well do if held with the big high street banks).

Money held in Green Bonds will go towards funding green initiatives in the UK as set out by the government. The categories for this spending are Renewable Energy, Energy Efficiency, Pollution Prevention, Climate Change Adaptation, living & Natural Resources, and Clean Transportation.

There’s no easily accessible list of what that means in real life, though this report outlines where the money went in the year 2021/22. It includes things like:

• The Social Housing Decarbonisation Fund
• Zero emission buses
• Home chargers
• The Nature for Climate Fund

So these accounts are actively trying to make a difference to the environment, rather than simply avoiding investing in things that make it worse.

Alternative ethical savings accounts

If you can’t lock your money away for three years, there are other ways to save ethically. And of course the environment isn’t the only motivation to save ethically.

I’d be sceptical of those that proudly say they offer a green account, when in reality all they do is plant a tree for each new customer, so do look a little deeper if you can.

Rates are often lower on ethical accounts, though some can be very competetive. I list some of the top paying options over in my savings best buy tables.

You’ll want to focus on accounts that follow one or a combination of the following:

Green and ethical banks

There are some providers who are proactively focused on ethical initiatives, and others that state they won’t lend your money to companies who aren’t green. These tend to have lower returns, but will make the biggest difference. They key players are Triodos and Ecology Building Society. Tandem also claim to have green credentials.

Sharia banks

Some accounts might be Sharia-compliant, meaning the bank won’t invest in companies involved in things like tobacco, firearms, alcohol and gambling. Gatehouse and Al-Rayan tend to pay the higher rates.

Building Societies

And then there are the building societies where the money you save with them is largely used for mortgage lending – so by default they can’t go towards oil, arms or other issues you don’t agree with.