Thousands of savers will see the interest rate cut on their National Savings & Investments (NS&I) Direct ISA from February, despite speculation that their interest rates should be rising.
NS&I has announced that from 27th February 2014, the interest rate on the popular Direct ISA will be cut from 1.75% to 1.50%, reducing the return for 316,000 savers.
The news comes after previous NS&I interest rate cuts to Premium Bonds, Income Bonds and fixed interest accounts. Furthermore, the popular Index Linked Certificates, which provide a tax-free, inflation linked return, have not been available to new savers for over a year.
The news will come as a disappointment to NS&I’s loyal savers, especially after it was announced in last week’s Autumn Statement, that NS&I will be able to raise more money next year from savers.
However, according to NS&I, the rate on their Direct ISA had to be cut after it became too competitive, as other banks and building societies either withdrew accounts or cut interest rates. Jane Platt, Chief Executive of NS&I, said: “The Direct Isa rate stood out in our review of competitor rates offered on ISAs with no bonus component. We consider the revised rate offers a fair rate to customers in the current interest rate environment.”
NS&I Direct Cash ISA alternatives
Since the financial crisis and concerns over the stability of some banks and building societies, NS&I has been a popular home for savers, attracted by the unlimited guarantee on all their savings.
However, the return for savers is clearly also important, so what are the best alternatives to NS&I’s Direct ISA?
New savers If you were planning to open a new Direct Saver with NS&I and have been put off by the interest rate cut, you could consider the Virgin Money Cash ISA (Issue 5) or the Britannia Building Society’s Select Access Cash ISA.
Both offer a rate of 1.75% with minimum starting balances of £1 and £500 respectively.
Existing NS&I Direct ISA customers If you are already an NS&I customer and are considering transferring your Cash ISA, both the Virgin Money and Britannia Building Society accounts will accept transfers in.
If you have a larger balance, you should also consider First Direct’s Cash ISA, which pays 1.70% on balances of £10,000 to £19,999, 1.85% from £20,000 to £39,999 and 2% on £40,000 or more.
Of course there’s no guarantee the interest rate on these accounts won’t be cut in the future, but at the moment they certainly beat the new NS&I Direct ISA rate of 1.50% from February.
Time will tell whether NS&I are able to increase interest rates in 2014 as it tries to attract more money from savers. If they don’t, they risk becoming uncompetitive to all but the wealthiest of savers, who will remain attracted by the unlimited 100% capital guarantee.