There may have been some slight signs of life in the savings market of late, but this unfortunately hasn't extended to the variable sector to any degree – and now we're faced with the announcement that NS&I will be slashing interest rates on four of its popular accounts from 1 May. Is it time to switch?
The Government-backed provider says that it's cutting rates in response to the reductions in interest rates that have been occurring since the base rate cut in August, which has had a dramatic impact on the sector. Rates have been plummeting to record lows ever since, with it only being in recent weeks that challengers have begun to buck the trend, but it seems that NS&I can no longer escape the pressure.
The rate cuts will apply to its Premium Bonds, Direct ISA, Direct Saver and Income Bonds, which will see cuts of between 0.10% and 0.25%; its Direct ISA and Income Bonds will soon pay rates of just 0.75% (down from 1.00%), while its Direct Saver will pay 0.70% (down from 0.80%) and its Premium Bonds will have a prize fund rate of 1.15% (down from 1.25%).
It's a huge blow to savers, but one that NS&I felt it had to take. "We have taken the time to absorb the impact of the Bank of England base rate reduction and subsequent changes across the savings market," said Steve Owen, acting chief executive of NS&I. "The new rates reflect current market conditions and allow us to continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector.
"We appreciate that savers will be disappointed, but we believe that the new rates present a fair offer to customers, who will continue to benefit from our 100% HM Treasury guarantee on all holdings, as well as tax-free prizes for Premium Bonds."
Steve also reiterated that NS&I was launching a new three-year savings bond, known as Investment Guaranteed Growth Bonds, in spring 2017. The bonds, which were first announced in the Autumn Statement, are expected to offer market-leading returns, with an indicative interest rate of 2.20% (the precise rate will be confirmed nearer to launch).
While many savers will be anxiously waiting for the launch of these accounts, it's worth pointing out that they come with a maximum investment limit of £3,000, so they may have limited appeal. They won't take away from the disappointment of variable rate cuts, either, but while the move has been met with criticism from the industry, it's also come as little surprise.
As Moneyfacts finance expert Rachel Springall points out, cuts were inevitable: "This is a huge blow for savers, but NS&I cutting rates below 1% was inevitable to adjust their market position … they made similar cuts in June 2016 and it resulted in their offers falling out of a top 10 position; the same is set to happen this year."
Danny Cox, chartered financial planner at Hargreaves Lansdown, agrees: "This comes as little surprise but this cut in interest rates is another devastating blow for millions of savers, and the new launch of Investment Guaranteed Growth Bonds will be of little compensation. Ironically with so little interest on cash for savers, Premium Bonds look more attractive."
The saving grace is that NS&I have announced the rate cuts well ahead of actually implementing them, so you've until May before the rates drop – which means it's time to start thinking about switching to something better.
But where can you switch to instead? Rachel suggests a combination approach: "Savings rates have continued on a downward spiral, so customers would be wise to check the best deals and consider spreading their cash across easy access, high interest paying current accounts and short-term fixed bonds to get the best returns over the next year or so."
There are still some good deals to be had, too, and you may want to move away from well-known names. As our easy access chart shows, RCI Bank currently has the top rate of 1.10%, closely followed by Leeds BS and West Brom BS, both with rates of 1.05%. At the other end of the scale, NatWest has by far the poorest deal on the block, with an easy access account paying a miniscule 0.01%.
If you want the potential for better returns, it could be worth thinking even further out of the box, which is something that many savers are expected to do. Danny explains: "NS&I will remain popular for their cast iron security, but lower interest rates and rising inflation will test savers' patience, and I expect more people to look to the stock markets for some of their cash to improve their long term returns."
This is something that should only ever be considered if you're comfortable with the risks of investing, but if you've got a savings pot that you can afford to dabble with, it could be worth testing the waters. A stocks & shares ISA could be a great place to start, offering the potential for better returns than its cash-based alternative, but make sure you fully understand them first. If you're not happy with such a risk, it's best to stick with cash, and check out our savings Best Buys and the top high interest current accounts to get the best returns possible.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.