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National Savings Cuts Interest Rates on Most Popular Products

More misery for savers as National Savings & Investments squeezes returns on Premium Bonds, ISAs, and Income Bonds -  prior to launch of ‘market-leading’ three-year bond

Emma Simon 7 February, 2017 | 2:16PM

National Savings & Investments (NS&I) will reduce the interest rates paid on four of its most popular products from May 1.

These include its ever-popular Premium Bonds, Income Bonds and its Direct ISA and Direct Saver accounts. Most of these accounts will now pay less than 1%.

NS&I said these cuts were in response to the Bank of England’s decision to reduce the base rate from 0.5% to 0.25% in August last year.

But existing customers have been left asking whether these cuts are to help pay for the new “Investment Guaranteed Growth Bonds” due to be launched this Spring. This three-year savings bond – which is expected to pay a return of 2.2% - was announced by the Chancellor in the last Autumn Statement.

But while its rate looks far more attractive, the maximum amount that can be deposited will be far more restrictive, with savers only able to invest a maximum of £3,000. In contrast, they can invest up to £2 million in a Direct Saver Account; £1 million in Income Bonds; £50,000 in Premium Bonds, and put the maximum ISA allowance (currently £51,240 but rising to £20,000 next year) into a Direct ISA each year.

Premium Bond Prize Fund Cut By £5 million

After these rate cuts the Direct ISA and Income bonds will pay 0.75%, while the Direct Saver account will pay just 0.7%.

The ‘prize fund rate’ on Premium Bonds will fall from 1.25% to 1.15%. This is the amount savers can expect to receive if they have “average luck”. To achieve this NS&I is reducing its prize fund by around £5m each month. Although it will continue to award two £1m prizes per month, the number of £100 and £50 prizes is being cut by a third. Currently it awards more than 70,000 monthly prizes in each of these categories. This will fall to just over 20,000.

‘Savers Will Be Disappointed’

Steve Own, acting chief executive of NS&I said: “We have taken 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.

“We appreciate that savers will be disappointed but we believe that new rates present a fair offer to customers, who will continue to benefit from our 100% HM Treasury guarantee on all holdings as well as tax-free prizes on Premium Bonds.”

Danny Cox, chartered financial planner at Hargreaves Lansdown said: “This comes as little surprise, but this cut in interest rates is another devastating blow for millions of savers and the new launch of Investment Guaranteed Growth Bonds will be of little compensation.

“Ironically with so little interest on cash for saver,s Premium Bonds start to look more attractive: if your savings are returning basically nothing, you might as well opt for the chance of the jackpot prize.”

He added: “NS&I will remain popular for their cast iron security but lower interest rates and rising inflation will test savers’ patience and I expect more people to look to the stock markets for some of their cash to improve their long-term returns.”

Higher Inflation Eating Away Savers Returns

The latest inflation figures show that the Consumer Price Index (CPI) is at a two-year high, rising to 1.6% in December. According to Moneyfacts.co.uk currently only 44 of the 669 savings products currently available pay a return that keeps pace with this. The majority of these accounts are three-year fixed rate bonds, which force savers to lock away their money at a time when inflation – and interest rates – are predicted to rise.

Rachel Springall, a personal financial expert at Moneyfacts.co.uk said: “With inflation expected to rise significantly over 2017 it is going to remain a dreadful time to be a saver.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk