NATIONAL Savings & Investments has slashed returns on its fixed-rate products by up to 1.1%, even though the Bank of England has reduced its rate by only a quarter point since the government’s savings arm last made cuts.

NS&I has cut the rates on its guaranteed income and growth bonds by up to 0.45%. The plans were introduced last month, replacing its fixed-rate savings, pensioners and capital bonds.

New savers in the one-year guaranteed growth bond will earn 3.5% before tax, down from 3.95% previously. The one-year income bonds will pay 3.4%, down from 3.85%.

The government-sponsored bank has also cut the rate on its index-linked savings certificates by up to 1.1%.

The return is made up of a set rate of interest plus the retail prices index, fixed for three or five years. New savers in the three-year plan will earn 0.25% above RPI, compared with a previous rate of 1.35% over the inflation index. Rates on five-year certificates are being cut by 1% to 0.35% above RPI.

With inflation at 4.1%, the return on the five-year certificate equates to 4.45%. Because the schemes are tax free, this is equivalent to a rate of 7.42% for higher-rate taxpayers and 5.56% in the basic tax band.

The three-year certificate pays a return equivalent to 7.25% at the higher rate and 5.44% for basic-rate payers.

NS&I blamed the cuts, which only apply to new customers, on falling gilt yields. Gilts are bonds used by the government to raise money and when yields fall they become less attractive to investors.

There is no change to returns paid on variable-rate accounts and investments, as these are more closely priced in relation to the Bank of England rate.