What’s the next best alternative?
National Savings & Investments have announced its plans to cut the interest rate on its popular Direct ISA from November to 1.25% (from 1.50%). What makes this announcement so disappointing is that the cut will affect both new and existing savers. This means that more than 400,000 savers that currently hold the Direct ISA will be affected. Although NS&I should at least be commended for giving savers plenty of notice, that will be of little comfort to those seeing their rate reduced. And it’s not the first time. The Direct ISA, like thousands of other existing savings accounts, has been hit with reductions in the last few years. Although its current rate of 1.50% has held strong since February 2014 and interestingly has been a best buy throughout that time, it wasn’t a surprise that NS&I announced a reduction, but more that they hadn’t done so sooner. NS&I, unlike any other savings providers, has a unique 100% government backed guarantee that frankly no other providers can compete with. So NS&I has to balance its need for savers' deposits with its competitive edge in the market.
With £3.8 billion held in the Direct ISA and NS&I taking around £800m a year into the account, it’s clear the account is popular. Added to the success of the 'Pensioner Bonds' launched earlier in the year and the increased allowance for the unique Premium Bonds, it’s easy to see why NS&I may now want to stem the flow of money coming in, so that it doesn’t breach it’s net finance target of £10bn for 2015/16. To put this into context, NS&I took in £9.1bn in the first 3 months of the year, almost double that for the same period last year.
So what’s the best alternative? Nationwide still offers the very best variable rate ISA rate, paying 1.60% AER, however this is only available to those that have a Flex current account. Alternatively, for an easy access ISA, Virgin Money is paying 1.56% AER provided no more than 3 withdrawals are made (rate drops to 0.75% if 4 or more withdrawals are made in any calendar year). The Post Office pays 1.51% AER on its easy access ISA but this comes with a 0.86% bonus for the first 12 months and is only available online. Find our more by looking at our Best Buy Tables or call one of our specialist savings advisers on 0800 321 3581.