Bad news for safety-seekers, I’m afraid. NS&I has cut its Direct Saver rate by 0.25%
NS&I, the old Post Office Savings Bank, has cut the rate on its Direct Saver account this week by 0.25% to just 1.50% Gross/AER. Apparently, we’ve only ourselves to blame.
The reason for the cut is that NS&I has been too successful. We added £15 billion to NS&I savings last year, far more than we took out. Snipping rates should slow this flow.
NS&I says a few savers placed big sums into the Direct Saver account since November and it must cut the rate as a result. Savers have been making fewer withdrawals too, which doesn’t help.
Jane Platt, head of NS&I, says the 0.25% reduction ‘was a very difficult decision’. I suppose we should be glad it wasn’t by more.
Yet the rate cut will be painful. Anyone with the maximum £2 million on deposit will see their annual interest payment drop £5,000 - from £35,000 to £30,000 (before tax has been deducted).
Savers like NS&I, even though many of its rates are less than competitive. It’s a financial oddity, designed to nudge us into lending to the Government - but not too much. As such, its Premium bond and account savers enjoy a 100% guarantee from HM Treasury that they’ll get their money back. In tricky times, that guarantee counts. Other savers can only rely on a maximum £85,000 payout per person if their bank or building society goes under.
So it comes as no surprise that savers have been flocking to safety under the wings of NS&I.
Existing savers in its Investment Account will go postal in May. That means no more paying in at the Post Office and no more cash withdrawals.
In July, the NS&I Easy Access account closes for good. Savers will have to switch to the Direct Saver account - which is a phone and internet-only account.
Both the Investment Account and Easy Access account are closed to new savers in the meantime. Frankly, that is no bad thing.
The Investment Account pays a piddly 0.2% or 0.3% on balances over £25,000. Instant Access range from 0.30% to 0.70% on balances over £50,000.
These rates are dreadful so what are your options? Direct Saver makes sense if you want security - you simply have to accept the new uncompetitive rate of 1.50%. Or if you haven’t yet taken out a cash ISA, the Direct ISA is paying a better rate of 2.50% but the amount you can invest is restricted to the ISA allowance, currently £5,340.
Perhaps parking some cash with NS&I is reasonable, but we wouldn’t place our entire life savings there. After all, you can live off interest but a Government guarantee won’t make a hearty evening meal.
The answer is to spread the rest of your cash around. Place other amounts with a range of best-buy banks and building societies - up to the maximum £85,000 to make sure that you are protected by the Financial Services Compensation Scheme (FSCS is the jargon) if everything goes wrong.
But keep your eyes peeled. Some banks are part of a bigger group. Under the FSCS, ‘single licence’ payouts are limited to £85,000 in total if you have money with a number of subsidiary brands.
Check out our handy FSCS explanation and guide.