Is it time to ditch NS&I savings accounts?


National Savings & Investments (NS&I) will cut the rate on three of its leading savings accounts next month.

The NS&I Direct ISA will be reduced from 2.25% to 1.75%, the Direct Saver from 1.50% to 1.10% and the Income Bonds from 1.75% to 1.25%.

These rate reductions of up to 0.5% were announced in June, but will come into effect on 12th September. Nearly 590,000 savers will be affected.

With drastic cuts looming just around the corner, is it time for us to ditch NS&I savings accounts?

The second wave
One reason to move your savings on is that this is the second wave of cuts from NS&I.

In August the Premium Bond prize fund's annual rate was reduced from 1.50% to 1.30%, which made the odds of winning less favourable.

Bond holders now have a 26,000 to one chance of winning a prize compared to a 24,000 to one chance previously. Read more in: NS&I cuts the Premium Bond prize fund. So NS&I looks far less appealing as a home for your cash across the board.

NS&I has to follow the crowd
Premium Bonds, as well as the Direct ISA, Income Bonds and Direct Saver, were seen as a lifeline to struggling savers that faced tumbling rates elsewhere.

But NS&I has now followed in the footsteps of banks and building societies and slashed rates on its savings products.

NS&I said it had to revaluate its range to balance the interest of taxpayers, savers and the stability of the financial services market.

Because savers were flocking to its top-paying ISA and monthly Income Bonds, the Government-backed savings scheme was at risk of being funded with too much money.

Unlike banks and building societies, NS&I has a 'Net Financing target' which is set by the Government
each year. For 2013/2014 this target was at risk of being exceeded as savers chasing the best rates were drawn to NS&I products.

According to NS&I the new lower rates will now reflect what is on offer elsewhere.

Looking for somewhere to stash your money? Check the latest savings rates

One reason to stay
One reason savers may be inclined to stay is the protection NS&I savings accounts offer.

NS&I savings are 100% guaranteed by the Government, which means all your savings are protected and you can get back whatever you put in should the institution collapse.

Most savings accounts only guarantee deposits of up to £85,000 per individual per institution via the Financial Services Compensation Scheme (FSCS).

Of course so long as you separate your nest eggs into chunks of £85,000 or less between different institutions you can ensure your money is 100% protected and earn a better rate!

Alternatives to NS&I savings
If you are ready to fly the NS&I nest, what are your alternatives?

The next best tax-free deal that can outshine the Direct ISA comes from Nationwide.

The Nationwide Flexclusive ISA also pays 2.25% and can be opened with just £1. The rate is boosted by a bonus of 0.85% which is fixed until the end of December 2014 and you can't transfer old ISAs in.

Another caveat is that the top 2.25% rate is only available to Flex current account customers. If
you're not you will have to apply for the Nationwide Easy Saver ISA (Issue 2) which pays the next best rate of 2%.

If you want to move on from NS&I's Direct Saver and/or Income Bonds you will need to look at easy access accounts.

Currently the best rate on an easy access account is 1.60% which both BM Savings and Coventry Building Society offer.

You will need £1,000 to open the BM Savings Online Reward 3 but the account comes with a 1.10% bonus that falls away after 12 months.

Alternatively the Coventry Building Society Online Saver can be opened with just £1 and doesn't come with a temporary bonus.

However, both of these leading accounts aren't easy access in the traditional sense. Both only allow four penalty-free withdrawals a year.

The best easy access account going that is truly easy access and doesn't come with a bonus that artificially inflates the rate is the Sainsbury's Bank eSaver Special. It offers the next best rate of 1.55% and you will need a minimum deposit of £1,000 to open it.

To chase an even better easy access rate you might want to think about using a current account for your savings.

The Santander 123 Current Account pays up to 3% on balances between £3,000 and £20,000, while Nationwide's FlexPlus pays 5% on balances up to £2,500 for 12 months.

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