National Savings hikes Isa rate fourfold for 100,000 savers

Almost 100,000 NS&I customers will see the interest paid on their tax free savings raised from 0.5pc to 2.25pc.

The Government-backed savings bank is to close it existing cash Isa account and move all customers into its Direct Isa account, which pays a far more competitive rate of interest.

National Savings & Investments said it has 94,000 customers in its T Cash Isa (which was for those who had previously had Tessas) and its Cash Isa. Both account currently pay just 0.5pc interest, while the Direct Isa currently pays 2.25pc.

However, this does mean that these customers will no longer be able to make cash withdrawals from these Isas at the Post Office, but will have to manage their new Direct Isa account by post, by telephone or online.

Customers will be automatically switched into this new account on May 25 this year.

Jane Platt, the chief executive of NS&I said that this move was part of the company's "modernisation programme".

"We have been working to simplify and modernise our range of savings product and to encourage our customers to invest with us directly.

"From May 25 customers holding our Cash Isa will benefit from the much higher interest rate paid on our Direct Isa. There will be some changes for our customers who use the Post Office however staff in our UK-based contact centres will be on hand to help with the transition."

These changes will also affect the millions of customers holding Premium Bonds. From April 1 this year customers will no longer be able to buy Premium Bonds, using cash at Post Office counters, however, they will still be able to buy these bonds at the Post Office if they are paying by cheque or with a direct debit card. Premium Bond can also be bought directly from NS&I.

NS&I said it has seen an increase in the number of customers transacting directly with it, by post phone or online in recent years, and this has delivered savings for the taxpayer. As NS&I has become more of a direct business it has withdrawn products from the Post Office, so not only Premium Bonds remain on sale at these counter.

Ms Platt said that despite the fact the bank it boosting interest rate thousands of customers, these changes would enable it to further reduce running costs, and would deliver a 10pc budget reduction in its budget by 2015 a requirement set down in the 2010 spending