National Savings cuts ISA rates to lowest ever rate

National Savings and InvestmentsThe Government-backed National Savings and Investments (NS&I) is to reduce the rate paid on its Direct ISA from 1.5 per cent to 1.25 per cent in a move that will affect about 400,000 savers UK-wide.

The move will be a blow to Scottish savers and likely exert additional pressure on many elderly people and families who were enticed into investing in ISA accounts because of their attractive rates and tax-efficient status.

The development comes with little likelihood of improvement soon with the Bank of England indicating that interest rates are unlikely to rise until 2017.

Interest rates have been at a historic low of 0.5per cent for the past six years and Bank of England Governor Mark Carney, wary of continuing economic uncertainty, has cautioned against expecting rate rises next year, after saying earlier a hike in 2016 was a possibility.

The new rate is the lowest NS&I has offered on their tax-free account since it was launched in 2008 and across the market as a whole, returns on tax-free savings have fallen to their lowest level since comparable records began in 2011.

Calum Bennie, a savings expert at Scottish Friendly, believes the move will trigger further cuts by other account providers.

“Given the Bank of England has recently indicated the outlook for interest rates remains stubbornly low, NS&I rate cut is not unexpected but will be disappointing for savers and is yet another blow to cash ISAs,” he said.

“This cut by a Treasury-led provider makes it likely that others will follow suit.”

Mr Bennie added savers should be braced for low interest rates for the foreseeable future, leading to poor returns on investments.

“Savers are set for at least a further year of dismally low interest rates. This is why more people are now dipping their toes into stocks and shares ISAs as a way of saving for their future,” he said.

“Although risk is attached, savers should seriously consider stocks and shares ISAs as a potentially higher return alternative to cash deposits.”

Tom Adams, head of research at consumer website Savings Champion, said of NS&I’s cut: “It is a blow in that its previous rate was one of the best ISA rates available, it’s now going down to a much less competitive level.

“Some people will find alternatives but others won’t be able to.”

The expert also said savers should not expect an upturn any time soon and signalled rates cuts were now “part of the savings landscape” and there was “no sign of the trend stopping” following NS&I’s decision.

“There is usually an alternative though. You can get much better rates if you look elsewhere,” he said.

“Savers should keep an eye on best buy tables. If the rate has gone down to an uncompetitive level take action.

“The onus is still on people to seek out alternatives and it is not always easy. So there can be blocks to moving to an investment with a better rate. People do not have the time and savers can be stuck on a particular account.”

NS&I will continue to attract savers because all deposits were backed by a Treasury guarantee, he added.

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