It follows NS&I’s regular review of the savings market, which includes an assessment of the interest rates payable on products comparable to Direct ISA.

The change will affect more than 316,000 people, the Treasury-backed organisation said.

NS&I chief executive Jane Platt said: “The Direct ISA rate stood out in our review of competitor rates offered on ISAs with no bonus component. We consider the revised rate offers a fair rate to customers in the current interest rate environment.”

It follows a number of changes made by NS&I this year to simplify its product range.

In May, it closed its Cash ISA, which had already been shut to new customers, with existing investors transferred to the Direct ISA. It also made some changes to its Income Bonds, including doing away with two different interest rates depending on how much customers invest.

Last year, it also made a number of changes to its fixed term investment products, including introducing a penalty for early encashment.

Danny Cox, head of financial planning at Hargreaves Lansdown, said: “This is a disappointing cut in interest rates for NS&I savers although not unsurprising. NS&I has to walk the tightrope of offering good returns to savers whilst keeping competition fair amongst other depositors. NS&I products will always have the advantage of 100% capital security and this additional protection comes at a price.”

Anna Bowes, director of savingschampion.co.uk, said: “Since NS&I’s unique protection is less valuable on the cash ISA as the amounts saved are likely to be below the FSCS compensation scheme limit, there are better rates available that can be transferred to – the Post Office Premier Cash ISA (not to be confused with NS&I it is now via the Bank of Ireland) is paying 1.80% gross/tax free. This rate includes a bonus of 0.90% for 18 months.”

NS&I sets its interest rates to balance the interests of savers, taxpayers and the stability of the broader financial services sector.