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Why NS&I may need to trim interest rates for millions of savers

Paloma Kubiak
Written By:
Paloma Kubiak

Savers continued to plough money into National Savings and Investment (NS&I) in April, though at a slower pace than March while ISA season started with a bang. But could rate cuts be on the cards for NS&I savers?

Deposits into NS&I accounts in April stood at £1.6bn, down from the £3.8bn recorded in March, according to the latest Bank of England Money and Credit report.

While this figure may not sound striking on its own, in the context of NS&I’s net finance target for 2023/24, it may mean it pulls back on some of the recent interest rate rises.

As part of the Spring Budget, a net financing target of £7.5bn in 2023/24 – within a range of plus or minus £3bn – was set to “reflect NS&I’s requirements to balance the interest of its savers, the taxpayer, and the wider financial services sector”.

According to Laura Suter, head of personal finance at AJ Bell, it could mean rate cuts may be around the corner.

She said: “NS&I continued to be a big beneficiary of savers’ money, as the security offered by the Government-backed provider appealed to savers spooked by the US banking mini-crisis. NS&I has also significantly increased its rates, providing another juicy lure for savers. April saw another £1.6 billion paid into NS&I accounts, less than half the £3.8 billion paid in March but still meaty inflows.

“If savers continue to flock to the provider we could well see NS&I cut rates to stem the inflows, so it doesn’t overshoot its fundraising target from the Government.”

Record-breaking ISA season

Savers have faced a number of threats and challenges to their cash in recent months, including rampant inflation, tax on savings for breaching the Personal Savings Allowance, as well frozen tax brackets and a dividend tax allowance cut.

Despite this, households deposited an additional £3.6bn with banks and building societies in April, following net withdrawals of £3bn in March.

The BoE revealed there was a record net flow of £9bn into ISAs, while over both March and April, a record-breaking £17.8bn was paid into cash ISAs as “savers rushed to shelter their money from the Government’s bumper tax grab,” Suter said.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “ISAs are having their moment in the sun. Higher savings rates and frozen tax thresholds mean protecting our savings from tax is a top priority. Millions of people are being exposed to new tax risks, so cash ISAs are beginning to look far more enticing.”

Cash in fixed rate savings and out of easy access accounts

Savers also plumped for fixed rate savings accounts as £3.7bn was deposited into these, though the figure recorded is down on the £6.5bn in March. Coles explained that the interest rates paid on new fixed rate savings rose 21 basis points to 3.83%, which was “music to the ears of savers, who have been getting increasingly frustrated by low savings rates. However, it also raised the risk they’ll pay tax on their savings.”

Meanwhile, savers withdrew £5.4bn from instant access accounts, representing the sixth consecutive month of outflows, “flying in the face of savers’ usual apathy about moving their savings to get higher rates”, Suter added. Next month’s figure could be higher if the BoE hikes rates again.

However, Coles said not all of this is “due to canny savers cashing in on higher rates”.

“There are also worrying signs that some people are dipping into their cash buffer too,” she said.

Coles added: “We withdrew £5 billion from easy access accounts paying no interest – which will include cash sitting in people’s current accounts in case of emergencies. This is up significantly from £1.5 billion in March, and is the sixth consecutive month of withdrawals. We’ve gone to the ends of the earth to cut our spending and try to find a way to make ends meet, but this may be a sign that we’ve run out of road. There are no more cuts to make, so we’re being forced to dip into cash we’d put aside for dire emergencies.”

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