National Savings & Investments (NS&I) announced that it will be cutting the rate on its tax-free ISA account from 1.5% to 1.25% in November.
As a result, over 400,000 savers who have deposited in NS&I’s Direct ISA will see their interest rates cut from mid-November.
The change will apply to £3.8 billion of savings from 16 November.
Jane Platt, chief executive at NS&I, called the rate cut a “difficult decision”.
“Interest rates in the easy access Isa market have been in decline over the year and our Direct ISA rate has stood out at the top of the best buy tables for some time,” Ms Platt said.
“To ensure that we continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector, we have taken the difficult decision to reduce the rate on our Direct Isa.”
Why did the NS&I decide to cut rates?
The decision to cut the rate comes down to the increasing popularity of the Direct ISA among savers.
For the first three months of this financial year gross inflows were £9.1 billion, almost twice the amount in same three month period the previous year.
Moving the product back to the middle ground for rates also ensures that there is fair competition in the market.
Susan Hannums of Savings Champion, commented: “The only surprise is that they have not done this sooner, with NS&I undoubtedly looking to stem the flow of money coming in after the success of the Pensioner Bonds earlier in the year and the popularity of the increase in amount you can save in Premium Bonds which saw them take in almost double the amount of inflows when compared to 2014/15 – £5.1bn.”