Ian Ackerley

NS&I said it must strike a balance between the interest of savers, taxpayers and the broader financial services sector.

The Premium Bonds prize fund rate will also be reduced and apply from the December 2020 draw.

In July this year, NS&I’s Net Financing target for 2020-21 was revised from £6 billion (+/- £3 billion) to £35 billion (+/- £5 billion) to reflect the Government’s funding requirements due to the COVID-19 pandemic.

A statement by NS&I says that in Q1 2020-21, NS&I saw inflows of £19.9 billion and delivered £14.5 billion of Net Financing, and demand for NS&I products has remained at similarly high levels during Q2.

Ian Ackerley, NS&I chief executive, said: “Reducing interest rates is always a difficult decision. 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.”

In response to the announcement, Kevin Brown, savings specialist at Scottish Friendly, said: “This announcement is a devastating blow for savers as NS&I has acted as a shield against the market’s heavy rate cuts in recent months.

“Only in March, NS&I cancelled plans to cut rates on its premium bonds and variable savings accounts to help support savers during COVID-19.  

“With this last stand now coming to an end, cash savers will feel they have almost nowhere to turn and will be wondering how long it might take for rates to return to pre-pandemic levels. For the time being, savers should consider whether the money they pay regularly into poor paying accounts could be better used elsewhere.

“Now could be a good time for people to divert some of their regular savings into paying down any debt that they have, as any interest made on cash savings will likely be swallowed up by the interest on credit repayments and the effects of inflation. Others may also want to consider stocks and shares as an alternative to cash, as they can offer the potential for more attractive returns, albeit with some risk attached.”