Savers suffer as Isa rates tumble

woman looks at piggy bank Image copyright Thinkstock

From Monday, life gets even tougher for savers, as National Savings and Investments (NS&I) brings in lower returns on its tax-free Individual Savings Accounts (Isas).

More than 400,000 NS&I savers will see interest rates on the Direct Isa cut from 1.5% to 1.25% a year.

That is the lowest savings rate since NS&I introduced the product in 2008.

Before the change was announced in September, the NS&I Direct Isa had been at the top of the best buy tables.

But it was forced to reduce rates, partly because of the success of pensioner bonds earlier in the year.

Government rules mean NS&I is not allowed to attract too much cash, in fairness to taxpayers and so as not to destabilise the savings market.

Even though the Bank of England's base rate has remained at 0.5%, Isa rates across the industry have tumbled.

TSB will cut rates on 11 December, and some HSBC customers are receiving letters about a reduction.

HSBC has told BBC News it will cut the ISA rate paid to long-serving customers from 1.5% to 1.3% from next January, saying it had taken a "difficult decision".

The highest paying Loyalty Cash ISA, for Premier current account users, will see the reduction, with matching falls for lower paying versions of the ISA.

Funding for Lending

Back in October 2014, the average instant access Isa rate was 1.09%, according to the Bank of England.

One year later, that had fallen to 0.98%.

Some experts believe conditions could improve for savers in January, when part of the Funding for Lending Scheme (FLS) comes to an end.

Under FLS, banks have been able to borrow funds cheaply from the Bank of England, lowering the cost of both loans and savings rates.

Anna Bowes, director of Savings Champion, believes new customers could benefit, although existing customers may not.

"We can but hope that the providers involved will turn back to savers to raise the funds they require, which could see savings rates being pushed up," she said.

"Unfortunately we wouldn't expect to see existing savers benefit from this."

Savers are being advised to move their money, as some lenders - such as the Coventry Building Society - have recently increased their Isa savings rates.

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