By Mark Fairlie

Government savings bank National Savings and Investments (NS&I) have confirmed that they will be cutting the interest rates paid on their Direct Individual Savings Accounts (ISAs) from September 2018.

NS&I plan to drop the rate of their Direct ISA from 1.00% to 0.75% later this year, affecting almost 400,000 savers across the UK.

The change comes just months after the government agency, who is responsible for funding the Treasury, saw their fundraising target drop from £8 billion to just £6 billion back in April.

ISAs and interest

Cash ISAs are often an attractive option for savers over the past seventeen years because they do not charge people tax on the interest on their savings. ISAs were also reformed in 2014 when George Osborne announced the total amount people could save tax-free would rise from £6,000 to £15,000.

The Savings and Contributions Act of 2017 also saw the introduction of the Lifetime ISA. This allowed savers to put an additional £4,000 into their cash ISAs up until the age of fifty or until they made a first-time home purchase. With a further government funded 25% bonus added to savings up to a maximum of £1,000, this rose the total amount that could be held tax-free in an ISA to £20,000.

Jill Waters, NS&I retail director, told the BBC that NS&I “ has taken the decision to reduce the interest rate on our Direct ISA to deliver positive value for taxpayers,” due to the Lifetime ISA reducing the amount that HM Revenue and Customs can receive from tax on savings.

She went on to say that, as part of the bank’s operational framework, they want to ensure they “continue to strike a balance between the needs of our savers, taxpayers, and the stability of the broader financial services sector.”

Bank of England base rate cut

National Savings to cut interest rates on Direct ISAs

Back in 2016, the Bank of England announced the base rate would be cut for the first time in over seven years; bringing the borrowing rate for other banks to a historic low of 0.25%.

Acting Chief Executive at NS&I, Steve Owen, said in a statement that the change in interest rates on their Direct ISAs was part of the bank’s plan to “absorb the impact” of the Bank of England’s base rate reduction as well as other subsequent changes within the savings market.

The drop in the base rate means that overall saving rates for the public have further decreased. NS&I have stated the new rates will reflect the current conditions of the market while helping them to “strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector.”

How will savers be affected?

More than 387,000 Brits currently hold Direct ISA accounts with NS&I, totalling more than £4.6billion in savings.

Where a £1,000 deposit into a Direct ISA would be worth £1,010.00 after twelve months under the current rate, the same amount of savings under the new rules would accrue just £7.50 in interest in one year.

According to Which, the average ISA in the UK contains £21,339. A saver holding this amount in a Direct ISA account with NS&I would lose as much as £53.36 a year under the new tax rate.

While research from Defaqto suggests cash ISA rates are still higher than they have been in seven years, with the average ISA attracting 0.7% interest compared with 0.53% in 2017, returns on ISAs have declined sharply over the past decade – discouraging many Brits from putting their money into savings.

Owen added that the bank understood savers would be disappointed, but that “the new rates present a fair offer to customers, who will continue to benefit from our 100% HM Treasury guarantee on all holdings.”