National Savings & Investments (NS&I) has announced that it is cutting the interest rate on its direct saver account by 0.25 per cent.

The change will reduce the rate to 1.5 per cent AER with immediate effect.

NS&I has justified the cut by claiming that it is on track to exceed the net financing target set for it by the Treasury each year.

The state-owned savings bank is allowed a maximum of £4 billion but is on track to hit £4.5 billion for 2011/12 and is reducing its rate to reduce deposits into the direct saver plan.

Jane Platt, chief executive of NS&I, explained, ‘Since November we have seen an increase in customer deposits.

‘This has been driven by a relatively small number of savers depositing large amounts of money, particularly into our direct saver account.

‘We have also seen a decrease in the number of customers withdrawing their money from products across our range.
 
She continued, ‘Reducing the rate on direct saver was a very difficult decision. However, we have to take action to try and moderate the level of deposits into this account over the coming months.’

Anna Bowes, director of savings advice website savingschampion.co.uk, dismissed the reduction in the NS&I account because savers should instead 'be looking for a new home for their money'.

She explained, 'The rate on this account was already shocking, as is the case with many NS&I products.

'This latest bit of news highlights the fact that the flight to safety is still rife, as savers look to the Treasury as the safest place to stash their cash. 

'However, the truth is if you split your cash to keep within the FSCS compensation scheme limits, there are far better rates to be found and your money will still be protected.'

Bowes directed savers to the Virgin Easy Access Saver account, provided by Northern Rock, with 2.85 per cent gross/AER as a much better option.

Net financing is a measure of the net change in NS&I funds, calculated by taking the net inflows, capitalised and accrued interest and prizes earned and subtracting the net outflows.

NS&I currently has net financing of 4.8 billion through the first three quarters of 2011/12 but expects a reduction in the final quarter.

Net financing reached £12.4 billion in 2008/09 but settled back to £1.6 billion in 2009/10 and £0.1 billion in 2010/11.