NS&I cuts interest rate on savings account

National Savings and Investments (NS&I) have announced a cut to the interest rate on its Direct Saver account.

NS&I is backed by the government and is able to give savers an absolute guarantee that it will never go bust. The government had set a target for NS&I to attract £2 billion in new savings for last year and they have indicated that they have exceeded the target by at least £2.8 billion.

This has led them to cut the interest on their savings account from 1.75% to 1.5% in an attempt to make it less attractive for savers and maintain competition.

The move has been welcomed by the Building Societies Association (BSA).

The news marks the end of a successful year for NS&I. In the summer, they had to close an index linked bond after the inflation-proofed investment attracted over 500,000 new customers in the space of four months.

NS&I also indicated that from November, they saw a small increase in customers who deposited large amounts of money into new Direct Saver accounts. Furthermore, there has been a decrease in the numbers of people withdrawing money from their accounts.

November also saw NS&I withdraw its Investment and Easy Access accounts, although the Investment account will still be available by post only from May this year.

The government protection offered by NS&I products is an attractive benefit for customers in the current financial climate. However, some experts argue that it is hindering Building Societies as they compete for new investment. This in turn makes it difficult for them to raise funds to offer mortgages to customers and may be hampering the housing market.

Every year, the treasury sets a net financing target for the NS&I. This years target was to reach a net amount of financing of £4 billion, taking into account money coming in and out of accounts. Last year, they had a total of £1.7 billion from just under 20,000 customers, with an average of £85,000 each in their savings accounts. The NS&I make the investments available for cheap borrowing by the government and ultimately provide savings to the taxpayer.

A spokesperson from the BSA argued that the government backing of the NS&I gives them an unfair advantage. The NS&I have been attracting over 10% of all the new savings in the UK and the BSA point out that they would have been forced to reduce interest rates to avoid exceeding this year’s £4 billion target and reaching around £4.5 billion in investments.

The cut in interest rates will affect the 20,000 customers with these accounts, and the NS&I hope it will trigger a reduction in the number of deposits. Jane Platt, from NS&I, said: “Reducing the rate on Direct Saver was a very difficult decision. However, we have to take action to try and moderate the level of deposits into this account over the coming months.”