The decision by National Savings and Investments this week to slash savers’ rates is likely to prompt other organisations to drop their rates, savings experts warned.
The state-backed provider’s rates plunged from market-leading to market-trailing levels with its announcement on Monday. But the full impact of the move is not expected to emerge for a few days, as banks and building societies decide how far they will go in following suit.
NS&I said it was cutting annual rates from November 24. Rates on its popular income bonds will fall from 1.15 per cent to 0.01 per cent, while the odds of winning its Premium Bond prize funds will also fall.
Anna Bowes, co-founder of Savings Champion, a savings adviser, said the “huge wall of money potentially being withdrawn from NS&I . . . could mean that the competition we have recently seen in the savings market could swiftly end, as providers could be swamped with new money”.
Savers may have only a few days left before smaller banks that generally offer the top rates in a fiercely competitive market adjust their current best offers of about 1.2-1.3 per cent.
Analysts say NS&I’s move is no temporary cut: as long as central bank interest rates stay ultra-low, it will have little reason to reverse policy.
The state provider announced in February that it would cut rates in May. It reversed that decision in mid-April to help the government borrow for pandemic-related spending.
With the Treasury raising NS&I’s target for net new financing (net inflow) from £6bn to £35bn for 2020-21, officials reported a huge inflow of £14.5bn in the quarter to June and are estimating similar numbers for the three months to the end of September, putting the annual target within easy reach.
Ian Ackerley, NS&I chief executive, said the provider was now returning to “a more normal competitive position”.
But advisers said savers wanting to stay in cash still have options. Sarah Coles, a personal finance analyst at Hargreaves Lansdown, the investment platform, said that with rates so low, many savers fail to act even when their cash is deposited at large high street banks paying 0.01 per cent. “People say there is nothing they can do, but it is a mistake.”
Newly-established challenger banks are still paying more than 1 per cent a year as they go for market share, she says. This week, OakNorth Bank launched a one-year fixed-rate account paying 1.31 per cent. Smaller building societies are also competing at this end of the market, with the Coventry Building Society, for example, this week offering 1.2 per cent on a limited-access deposit account.
But analysts warn that savers should move fast, as appealing offers are snapped up and banks quickly reach fundraising goals. This month, for example, an easy-access account paying 1.2 per cent from Skipton Building Society was available for only three days.
Ms Coles says investors should not feel uncomfortable with placing funds with small lenders with unfamiliar names. The same £85,000 government deposit guarantee that covers high street banks applies to the rest of the pack.
Interest rate cuts should encourage savers to review their overall financial position, advisers added. Outstanding debts should, if possible, be paid down, they said, as the interest rates charged to borrowers, especially on credit cards, remain far higher than those paid to savers.
Meanwhile, NS&I’s move creates an opportunity for investors to think again about alternatives to cash. Kevin Brown, savings specialist at Scottish Friendly, said savers may “want to consider stocks and shares . . . as they can offer the potential for more attractive returns, albeit with some risk attached”.