NS&I orders dramatic savings rate cuts

The Government-backed bank has slashed it savings rates, including its table-topping 2.25pc Isa, in response to steep falls in interest offered across the market.

National Savings & Investments will cut the rate on three savings products, the Direct Isa, which will drop from 2.25pc income to 1.75pc, the Direct Saver, which has been cut from 1.5pc to 1.1pc and its Income Bond which will pay 1.25pc, reduced from 1.75pc.

It will affect nearly 590,000 customers across the free products.

Telegraph Money last month predicted NS&I would slash rates in reaction to pressure from the rest of the savings market.

It was reported at the time that industry experts feared that the Government-backed bank would soon be forced to follow the lead set by other banks and building societies, and reduce the returns paid on many of its savings products.

At current rates, both the Isa and the Income Bonds pay some of the most competitve rates on the market.

The Direct Isa is not quite the best buy at 2.25pc, but it is the only Isa without a bonus rate or a caveat.

Nationwide offers an Isa paying 2.5pc, but customers must also have a Nationwide current account, otherwise it pays 2.25pc. A Cheshire Building Society rate of 2.3pc includes a large 1.8pc bonus, disappearing at the end of October 2014.

It is therefore a blow to the savings market that the only catch-free competitive paying Isa will face such a significant drop in interest.

Jane Platt, NS&I chief executive, said: “Rates across the savings market have fallen over recent months and to ensure we continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial sector, we have taken the difficult decision to reduce the rates on our Direct ISA, Direct Saver and Income Bonds accounts.”

NS&I is a route for the Government to borrow money domestically, an alternative to issuing bonds for investors to buy, known as gilts. Its products are popular because deposits are fully guaranteed by the Government. Most savings accounts only guarantee savers' deposits to a maximum of £85,000.

Unlike banks and building societies, NS&I is set an annual "net financing target" by the Treasury which governs how much money it raises each year from savers.

The target is based on a balance of the interests of savers, the wider financial services industry and taxpayers.

Because savings rates across the market have been pushed down from already depressed levels since last summer, largely because of the Government-backed Funding for Lending Scheme (FLS), operated by the Bank of England, it meant that NS&I's products had emerged at the top of the best buys.