View the article online at http://citywire.co.uk/money/article/a894507
NS&I cuts savings rates, widens Premium Bond odds
Savers have been dealt another blow as National Savings & Investments (NS&I) reduces interest on its variable-rate savings products.
Savers received another blow today as National Savings & Investments (NS&I) announced it will reduce the interest on its savings accounts and ISAs.
With the Bank of England 'base' still languishing at a historic low of 0.5% after seven years, the government-backed NS&I has offered savers some respite.
However, it is now reducing the interest rates on five of its variable-rate products and changing the fixed interest component offered to holders of its index-linked savings certificate.
The variable rate changes will be:
- Direct ISA: reduced from 1.25% to 1% from 6 June
- Direct Saver: reduced from 1.10% to 0.8% from 6 June
- Income Bonds: reduced from 1.25% to 1% from 6 June
- Investment Account: reduced from 0.75% to 0.45% from 1 July
The odds of a Premium Bond win are also tough as the prize fund rate has been reduced from 1.35% to 1.25%, meaning the odds of winning are now 30,000-to-1 compared to 26,000-to-1.
The total prize fund will be reduced from £67,584,900 in March 2016 to an estimated £62,897,175 in June 2016. There will be fewer large sum prizes awarded, with £5,000-plus prizes reduced from 7% to 5% of the pot. Medium-size prizes of £500 to £5,000 will remain at 5% of the fund while lower value prizes of £25 to £500 will make up 90% of the prizes awarded in June, up from 88% in March.
NS&I has also made changes to its fixed-term savings product for those customers with maturing investments.
Index-linked savings certificates are not currently on sale but still available to those who hold the products and reach the end of their investment term. The fixed interest part of the rate, which is paid in addition to the index-linked part, will be reduced from 0.05% to 0.01% for those renewing certificates that mature on or after 28 March.
Jane Platt, chief executive of NS&I, said the cuts had been made as persistently low interest rates meant competitor savings rates had fallen, leaving NS&I at the top of the savings tables.
This has led to too much money flowing into its products and affecting its net financing, the balance of all the money savers have paid in after the full amount NS&I has paid out. The financing target, which is set by the Treasury, stands at £6 billion, with a range of £4 billion to £8 billion but in the current financial year it is forecast to raise £11.5 billion against a £10 billion target.
‘It is always a difficult decision to reduce rates but downwards movements in interest rates across the cash savings markets mean that our rates have risen in the competitor tables,’ said Platt.
‘NS&I aims to strike a balance between the needs of savers, taxpayers and the stability of the broader financial services sector, while raising the required level of net financing for the Treasury. These changes will allow us to manage demand in order to achieve our new net financing target, and deliver positive value to taxpayers.’
She said the majority of the new interest rates on offer were ‘either at or above average market rates’ and presented 'a fair offer to customers’.
Danny Cox, chartered financial planner at Hargreaves Lansdown, the investment broker, said although the cuts were not a surprise, they were bad news for savers.
‘This is another serious blow for savers who like the absolute security offered by NS&I, but now face even lower returns on their cash. Cuts are not a huge surprise given the market isn’t now expecting an interest rate rise until 2017 at the earliest, and NS&I is also looking to raise less money in the coming financial year,’ he said.
‘The cuts will also marginally hit those rolling over index-lined certificates, though the interest paid above inflation was already so minimal as to make the rate reduction largely academic. Despite the low inflation environment, index-lined certificates remain valuable as a long-term guaranteed hedge against rising prices, and savers should still consider rolling them over at maturity.’
He added that premium bonds were ‘looking increasingly unattractive, but may still be a solution for higher rate taxpayers looking for a temporary home for some of their cash’.
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