Millions of savers with NS&I have been dealt a blow after it announced it would slash interest rates in November and cut the Premium Bonds prize fund a month later.
Savers with NS&I’s popular direct saver account will receive a cut in rates from 1% to just 0.15%, while the return on income bonds – which had been best buys – will plummet from 1.15% to 0.01%.
The government-backed organisation, which has 25 million customers, said there would be cuts to variable rate accounts and some fixed rates as it attempted to “strike a balance between the interests of savers, taxpayers and the broader financial services sector”.
It had become a first port of call for savers looking for returns after the Bank of England cut interest rates to a record low and savings providers started to follow suit.
Last week, the Bank voted to hold the base rate at 0.1%, but said it was looking at the possibility of cutting it to below zero.
The cuts announced by NS&I on Monday are deeper than those NS&I had planned earlier in the year but then put on hold as the pandemic hit, and were described by experts as a “devastating blow” for savers.
From 24 November, returns on the direct saver, investment account, income bonds and NS&I’s Isas will fall.
The junior Isa will remain the best-paying account it offers, but rates will drop from 3.25% to 1.5%. Rates on the direct Isa will fall from 0.9% to 0.1%.
The changes to Premium Bonds, which come into effect for the December prize draw, will reduce the prize fund from an effective interest rate of 1.4% to 1%.
For bondholders that means the odds of any one £1 number winning a prize will decrease from 24,500-1 to 34,500-1.
There will still be two chances to win the £1m jackpot each month, but the number of £100,000 prizes will fall from seven to four and there will be cuts across all of the other prizes.
Ian Ackerley, the NS&I chief executive, said: “Reducing interest rates is always a difficult decision.
“In April we cancelled interest rate reductions announced in February and scheduled for 1 May. Given successive reductions in the Bank of England base rate in March, and subsequent reductions in interest rates by other providers, several of our products have become ‘best buy’ and we have experienced extremely high demand as a consequence.”
The dearth of decent savings rates has gone hand in hand with a rise in deposits in banks and building societies as workers who have kept their jobs but have not been able to spend as usual have built up reserves of cash.
Last week, Skipton building society had to pull a best-buy savings account after three days after a rush of customers to sign up, and according to financial information firm Moneyfacts, average interest rates across all kinds of accounts are generally down by more than half on this time last year.
NS&I is set a financing target by the Treasury each year. This was raised from £6bn to £35bn after the pandemic hit to help the government pay for its crisis measures, but between April and June £19.9bn flowed into accounts and demand has remained similarly high over the summer.
Kevin Brown, a savings specialist at the Scottish Friendly society, said: “This announcement is a devastating blow for savers as NS&I has acted as a shield against the market’s heavy rate cuts in recent months.”
He added: “With this last stand now coming to an end, cash savers will feel they have almost nowhere to turn.”
Sarah Coles, a personal finance analyst at stockbroker Hargreaves Lansdown, said she expected more cuts from other providers.
“This won’t be the end of it. Competitive accounts in the easy access market – who have been forced to keep within shouting distance of NS&I in order to raise cash – will be able to cut back too. It means we’re likely to see the best rates disappear.”
