NS&I to make ‘savage’ cuts to interest rates and Premium Bonds from November

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There are fears that a recent recovery in savings rates could be thrown into reverse after National Savings & Investments today took a wrecking ball to its accounts, with ‘absolutely savage’ cuts to come into force in November.

The Treasury-backed bank this morning announced that from December the odds of winning anything in the Premium Bonds draw will go from 24,500 to one to 34,500 to one, and the estimated number of total prizes won reduced by 1million.

NS&I will also take the knife to its other market-leading accounts from 24 November, with its Income Bonds to go from paying 1.15 monthly interest to just 0.01 per cent, the same pitiful rate paid by Britain’s biggest banks.

It comes after billions of pounds have poured into NS&I during the pandemic.  

Its Direct Saver will pay just 0.15 per cent, down from 1 per cent now, and its Direct Isa 0.1 per cent, down from 0.9 per cent. 

Its fixed-rate accounts will be also be cut further, as those cuts did go ahead as planned in May, but this will not affect savers until their terms come to an end.

Savings analysts have long kept one eye on NS&I’s next move, with the bank, which helps to fund the Government’s spending, having to balance the rate paid to savers with the cost to the Treasury.

Its decision in mid-April to reverse cuts to many of its accounts which it planned to implement in May to support savers amid the coronavirus pandemic, helped to stabilise savings rates and provide a safe haven for billions of pounds of lockdown savings.

But the cuts announced today are far more brutal than originally planned:  

The previous move, which was followed three months later by the decision to massively increase the amount it needed to raise from savers, from £6billion to £35billion, laid the foundation for a recovery in the savings market over the last two months.

Smaller banks have launched best buy fixed-rate bonds and Isas, having needed to leapfrog NS&I’s best buy rates to attract savers, while in the last week two building societies have launched easy-access accounts, albeit ones with withdrawal restrictions or bonus rates, paying more than its Income Bonds for the first time since mid-May.

But analysts have speculated for weeks as to whether the Treasury-backed bank would cut its savings rates, especially as the Government looks to mark the end of other aspects of its coronavirus response programme like the furlough scheme, having been deluged with savers’ deposits since April.

NS&I said a net £14.5billion had been deposited with it between April and June, and that ‘demand for NS&I products has remained at similarly high levels between July and September’.

If similar sums were deposited over this period, it would mean NS&I would have raised £29billion of its target in just six months.

This is Money earlier this month raised the question of whether cuts to its savings rates would be announced soon, having reported record amounts of Premium Bonds being purchased for five successive months and more than £8billion deposited into the tax-free Bonds since March.

The record amounts saved over the lockdown months and largely deposited into NS&I has resulted in the Treasury-backed bank announcing cuts far heavier than what it had initially announced in February.

Goldman Sachs-backed Marcus Bank pulled up its own drawbridge at the start of June after taking in billions of pounds from savers that left it close to breaching British banking rules. 

NS&I’s cuts mean that far fewer Premium Bond prizes will be won despite there being more Bonds in the draw than ever before, reversing a recent trend where NS&I has had to add the number of non-£1million prizes to keep the effective prize fund rate at 1.4 per cent.

Last week, it revealed it was going paperless, meaning those who win Premium Bond prizes will no longer receive cheques, a staple for the product since 1964.  

Anna Bowes, co-founder of Savings Champion, previously told This is Money she hoped the bank’s net financing target would be increased to continue to support savers.

James Blower, an industry expert and adviser to savings banks, called the cuts ‘absolutely savage’.

Kevin Mountford, co-founder of savings platform Raisin UK, said: ‘Whilst we expected that the NS&I rates would drop sometime soon, the extent of the reduction is maybe far greater than anticipated but reflects that fact that the Treasury will have reached its target.’

And while the news is devastating for NS&I’s 25million savers, the impact of its cuts could have repercussions far beyond them.

Its decision to reverse its earlier cuts distorted the easy-access market, with its rates far higher than they otherwise would be considering a record low Bank of England base rate of just 0.1 per cent, with few banks and building societies challenging it until very recently.

Its cuts could therefore lead to a downward spiral in easy-access rates as smaller banks struggle to cope with the volume of savings their best buy rates would attract.

And they could also hit the recovering fixed-rate bond and Isa markets, with banks no longer needing to pay more than its market-leading easy-access rates to attract any significant volume of money from savers. 

Anna Bowes said: ‘Unfortunately a very real consequence of a huge wall of money potentially being withdrawn from NS&I in response to these impending cuts, could mean that the competition we have recently seen in the savings market could swiftly end, as providers could be swamped with new money.’ 

Mountford added: ‘This spells disappointing news for savers but let’s hope that the rest of the market doesn’t follow suit and adjust rates accordingly.’

NS&I’s chief executive Ian Ackerley said: ‘In April we cancelled interest rate reductions announced in February and scheduled for 1 May.

‘Given successive reductions in the Bank of England base rate in March, and subsequent reductions in interest rates by other providers, several of our products have become “best buy” and we have experienced extremely high demand as a consequence.

‘It is important that we strike a balance between the interests of savers, taxpayers and the broader financial services sector; and it is time for NS&I to return to a more normal competitive position for our products.’