NS&I announces rate cuts on popular best buy accounts

16th February 2017

This month, National Savings & Investments (NS&I) announced that it will reduce the interest rates on its three savings accounts with effect from May 2017, two of which currently appear in our best buy tables and have even been market-leaders in the last few months.

This is obviously disappointing news for savers, in particular those that have flocked to NS&I due to the combination of competitive rates and 100% guarantee of all funds held in the accounts, regardless of the balance. However, the good news for savers is that there are higher paying alternatives to which you can turn, although the protection would be limited to £85,000 through the Financial Services Compensation Scheme (FSCS) or €100,000 through an equivalent European scheme.

For example, Income Bonds will reduce from a competitive 1% to 0.75% gross/AER, but you can get a similar easy access account with a significantly higher rate of 1.10% from RCI Bank UK. If you looking for an alternative cash ISA, whilst the Direct ISA will also reduce from 1% to 0.75%, Paragon Bank offers a higher paying alternative at 1.05% tax free/AER.

So, you can get a better return by switching to an alternative – for more options, take a look at our Easy Access and Variable Rate Cash ISA Best Buy Tables.

Whilst extremely disappointing, the announcement came as little surprise to us, especially given how long the rates have been competitive for. When NS&I previously cut interest rates, it has been as a response to being too competitive in the savings market, which combined with 100% of funds being guaranteed by the Treasury, was giving NS&I an unfair advantage over other savings providers.

When announcing the cuts this time, NS&I stated that this was in response to interest rate reductions across the savings market, as a result of the reduction in the Bank of England base rate in August 2016.

Steve Owen, Acting Chief Executive of NS&I stated the following - “We have taken the time to absorb the impact of the Bank of England base rate reduction and subsequent changes across the savings market. The new rates reflect current market conditions and allow us to continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector.”

The changes are as follows;

Direct ISA – 1% AER reducing to 0.75% AER
Direct Saver – 0.80% AER reducing to 0.70% AER
Income Bonds – 1% AER reducing to 0.75% AER

All taking effect from 1 May 2017

So, if you hold one of these accounts or were considering opening one, take a look at some of the alternatives or call us on 0800 321 3581 for help and guidance.

NS&I has stated that these cuts are a response to the reduction of the base rate last August and it is by no means on its own when it comes to cutting rates. In fact, of all the established traditional providers, even after the rate reductions take effect in May, NS&I will still pay a significantly higher rate on its easy access Income Bonds than the high street banks.

For example, if you were investing £10,000, the highest rate amongst the high street banks is a measly 0.25% gross/AER from HSBC, dropping to a downright insulting 0.01% on offer from NatWest.

The advice is simple – switch from poor paying accounts to better alternatives. If we cannot rely on the established names for competitive returns, then it is time to try a new name. With the same regulation and protection in place as the bigger names, there is no reason not to consider one of the lesser known providers. If you are unsure, sticking to the Financial Services Compensation Scheme (FSCS) limit (£85,000) or equivalent European scheme (€100,000), means you can ensure that your funds are protected, should the worst happen.

If you need any help looking for an alternative or would like to discuss your savings in more detail, please get in touch on 0800 321 3581, we’d love to hear from you.

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