Top tax-free rates are squeezed after NS&I’s cuts to savings rates

British savers have been dealt yet another blow after the government-backed NS&I took an axe to savings rates, throwing returns across the board into reverse.  

The average rate paid by the best five easy-access cash Isas had risen from 0.78 per cent to 0.92 per cent between the start of September and 21 September, when National Savings & Investments announced it would slash rates from November.

But since then the average rate has fallen from 0.92 per cent to 0.85 per cent, while one-year fixed-rates have fared even worse, according to figures from analyst Savings Champion.

Tax-free Isa rates have been squeezed since National Savings & Investments announced cuts last month

Tax-free Isa rates have been squeezed since National Savings & Investments announced cuts last month

Tax-free Isa rates have been squeezed since National Savings & Investments announced cuts last month 

NS&I has offered the best deal for savers for months, but customers were told their interest would fall from 1.15 per cent to just 0.01 per cent next month. 

Its tax-free easy-access account will be cut from 0.9 per cent to 0.1 per cent, costing savers with £20,000 saved £160 a year in interest.

Now the effects are being felt by those with savings held elsewhere too.  

Between 1 and 21 September the average rate paid by the five best one-year fixed-rate Isas rose from 0.77 per cent to 0.96 per cent and the best buy rate from 0.85 per cent to 1.02 per cent.

Since NS&I announced, the top five average has slumped to 0.79 per cent and the best buy rate has fallen by 0.2 percentage points to 0.82 per cent, costing a saver looking for the best deal around £40 a year in interest on the full Isa allowance of £20,000 a year.

‘Quite clearly the dreadful news from NS&I is having a negative impact on the savings market, it put a sharp brake on the competition that had been building until that point,’ Anna Bowes, co-founder of Savings Champion, said.

‘At this point, things are still better than they were – but the competition that had been active has fallen.’

The smaller challenger savings banks which often top This is Money’s best buy tables were quick to make cuts to their savings rates in the aftermath of NS&I’s cuts. 

‘I think it’s fair to say that the impact from NS&I was immediate and has stimulated a reduction in rates across the market including Isas,’ one savings chief at a challenger bank told This is Money.

How NS&I’s cuts reversed an improvement in cash Isa rates 
Date  Easy-access top five average rate  Best buy easy-access Isa rate One-year fixed-rate top five average rate  Best buy one-year fixed-rate 
1 September 0.78% 0.9%  0.77%  0.85% 
21 September  0.92%  0.96%  0.96%  1.02% 
28 September  0.97%  1%  0.91%  0.93% 
1 October  0.92%  1%  0.87%  0.92% 
14 October  0.85%  0.96%  0.79%  0.82% 
Source: Savings Champion 

The Treasury-backed savings bank had previously helped usher in a period of calm in the savings market with its best buy rates, and even sparked a recovery towards the end of the summer as the economy recovered and banks in need of money to fund lending had to pay more than its best buy easy-access offerings.

Few banks took on its easy-access deals but many instead improved their short-term fixed-rate bonds so savers were offered a premium to tie their money up.

Bankers previously told This is Money that NS&I’s decision not to cut the rates on its variable rate accounts earlier this year to support savers during the coronavirus and which saw it rake in more than £33billion between April and August, had helped to artificially prop up savings rates.

‘When you have a provider of the scale of NS&I with the government guarantee on deposits they will naturally distort the market which we saw for around six months,’ the senior savings banker said.

With NS&I now out of the way and savers set to see their returns fall significantly, savings banks with smaller balance sheets are likely to fill up with cash quickly and cut rates even further as a result.

Are cash Isas losing their shine?

Savers have largely shunned tax-free savings accounts this year.

Figures from the Bank of England found savers pulled out £386million from cash Isas between March and August, with easy-access accounts seeing £54.4billion deposited over the same period.

Suzanne Lewsley, chief deposits officer at the challenger bank Ford Money, said: ‘Given the current low interest rate environment, we have seen the personal savings allowance, which lets basic rate taxpayers earn £1,000 of interest a year before they have to pay tax on it, stretch further than before when rates were higher. 

‘This has ultimately contributed to a shift in customer demand away from Isa products, as UK savers want products that offer higher non-Isa rates for their savings.’

In an unusual twist, savers who haven’t ditched their old Isa may now be better off.

According to Savings Champion, the average rate paid on a ‘closed’ easy-access Isa no longer available to new customers is 0.4 per cent, but the average rate available on new deals now is 0.28 per cent, a difference of £24 a year in interest on the full £20,000 Isa allowance.

But averages can be misleading. Both rates can be comfortably beaten by switching. 

The best easy-access Isa available is offered by Coventry Building Society, and pays 0.96 per cent on deposits of £1 or more. It can be opened online, accepts transfers and limits savers to three withdrawals a year.

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