Bad news for savers: NS&I cuts Isa interest rate
There's more bad news for savers as National Savings & Investments (NS&I), the government-backed bank, has slashed the interest rate on its Direct ISA, from 1.75% to 1.5%.
The change will come into effect on 27 February 2014, and NS&I will be notifying affected customers at least sixty days in advance.
NS&I said it had to cut the rate in order to "balance the interests of its savers, taxpayers and the stability of the broader financial services sector".
Jane Platt, NS&I chief executive, said: "The Direct ISA rate stood out in our review of competitor rates offered on Isas with no bonus component. We consider the revised rate offers a fair rate to customers in the current interest rate environment."
On 1 August 2013, NS&I cut the premium bond prize fund rate from 1.5% to 1.3%, making it harder to win a monthly prize. It meant the total number of prizes was slashed from 1,903,314 in July 2013 to 1,751,061 the following month - taking the odds of any £1 Bond number winning a prize from 24,000 to 1 to 26,000 to 1.
It’s not necessarily all doom and gloom, however. In the Autumn Statement, the chancellor announced the government’s net financing target for NS&I in 2013-14 had been revised upwards by £2 billion.
NS&I had been working towards a net financing target for the year of £0 (give or take £2 billion either way), but it was on track to deliver net financing of £3.5 billion - way above target. With a newly-revised goal of £2 billion (again, give or take £2 billion either way), NS&I does not need to do anything drastic - such as make more cuts to interest rates - to meet the earlier, lower target.
Had it been forced to reduce its net financing, it would likely have had to cut rates so that more savers cash-in their NS&I products.
Platt continued: "We know that we occupy a unique position at the heart of the UK savings market. We work hard to ensure we continue to strike a balance between the interests of our savers, taxpayers and the broader savings sector.
"[The] increase in our net financing target means that savers can continue to invest with us at fair rates."
NS&I customers can sign-up for email notification of all NS&I interest rate changes and other NS&I at nsandi.com/savings.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.