NS&I slashes interest rate for Direct Isa customers

The Treasury-controlled savings body said it had taken the “difficult” decision to reduce the rate on its Direct Isa by a quarter of a percentage point from 1.5 per cent to 1.25 per cent, effective from November 16.

The product is yielding less than a quarter of the headline interest rate of 5.3 per cent announced by NS&I when it launched it in April 2008. It last cut the rate, from 1.75 per cent, in February, reports The Times.

The move is in sharp contrast to most banks and building societies, which have been gently pushing up rates in recent months as small banks compete more aggressively for custom and as the industry adjusts to the possibility of base rate being lifted from its six-year low of 0.5 per cent in the next year.

Even Isa rates, which are slower to adjust because of the stickiness of customers, have risen slightly in recent months, according to Moneyfacts. The average cash Isa pays 1.51 per cent, up from 1.45 per cent six months ago.

However, NS&I insisted instant access cash Isa rates had been falling, pushing its offering to the top of the best buy tables. The institution said it had to balance the interests of savers, taxpayers and competitors in setting its prices.

It is already scrambling to adjust after its highly popular pensioner bonds and the raised ceiling on premium bond holdings produced a surge in net inflows to £5.4 billion in the first quarter of its 2015-16 financial year. It has been set a net financing target of £10 billion for the full year, so it drastically needs to slow the rate of inflows.

Yesterday it insisted that the Isa rate cut was not driven by this imperative. However, it has had to move speedily in the past to stem inflows, notably when it withdrew a popular inflation-protected bond just months after launching it in 2011. More than 404,000 savers have £3.81 billion invested in Direct Isas.

Among mainstream institutions, Nationwide offers the best instant access Isa, paying 1.6 per cent, though it is only available to FlexAccount customers. Virgin has an Isa offering 1.51 per cent, with some restrictions on withdrawals. HSBC Premier customers are eligible for 1.5 per cent from its Isa.

NS&I upset some old Isa customers when it removed it from sale in 2009 and disallowed post office withdrawals in 2013. Customers were automatically transferred to the Direct Isa, which can only be accessed online or by phone.

The institution has been criticised by building societies for competing unfairly, in particular with pensioner bonds, which offered far higher interest rates than available in the private sector.

Jane Platt, chief executive, said: “Interest rates in the easy access Isa market have been in decline over the year and our Direct Isa rate has stood out at the top of the best buy tables for some time. To ensure that we continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector, we have taken the difficult decision to reduce the rate on our Direct Isa.”

• Santander used the explanation of falling savings rates to justify a 150 per cent increase in the fee it charges for its popular 123 paid-for current account, from £2 a month to £5. The bank has aggressively poached customers from rivals since launching 123 three years ago. More than 3.8 million people have a 123 current account. It also raised the fee for its 123 cashback credit card, from £24 to £36 a year.