NS&I, which is controlled by the Treasury, cut the rate on its Direct Isa from 1.5 per cent to 1.25 per cent, the lowest since the product was launched in 2008, reports The Times.
That represents a £50 million hit to the interest that would be paid for the next five years on the £3.8 billion invested in the NS&I Isa. It is equal to a cut of £660 in interest payments over five years on savings of £50,000.
Critics expressed surprise when the move was first mooted two months ago, given that banks were putting savings deals up in the expectation of higher base rates from the Bank of England.
Since then, a slowdown in the economy means that rates will stay lower for longer and banks already have begun to follow suit by slashing returns. Calum Bennie, savings expert at Scottish Friendly, said: “Given the Bank of England has recently indicated that the outlook for interest rates remains stubbornly low, [this] NS&I rate cut is not unexpected but will be disappointing for savers and is yet another blow to cash ISAs. This cut by a Treasury-led provider makes it likely that others will follow suit.”
A recent study from Scottish Widows found that 74 per cent of the population now put money into savings accounts on a regular basis, up from 63 per cent five years ago. A £10,000 investment over five years at 1.25 per cent will be worth only £10,641, but if interest rates were 5 per cent the same fund would have grown to £12,763.
Experts said investors needed to be willing to take higher risks. “Although risk is attached, savers should seriously consider stocks and shares ISAs as a potentially higher-return alternative to cash deposits,” Mr Bennie said.
John Blowers, head of the broker Trustnet Direct, said: “If you’re investing for the long term, history shows us that a broad-based portfolio of shares, which can be bought cheaply through a managed fund or investment trust, will perform far better than cash.”
