National Savings & Investments will cut the rate on its tax-free ISA account by 0.25% to 1.25%, after finding itself with bumper inflows of cash.
The Direct ISA, with market-leading returns, had been attracting upwards of £800m a year from savers desperate to find a reasonable return, while taking advantage of a 100 per cent government guarantee.
Even more significant was the boost from the highly popular Pensioner Bonds and by the Premium Bond maximum limit going up to £50,000.
Jane Platt, Chief Executive, said it was a "difficult decision" but the institution had to "strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector."
The cut will apply to £3.8 billion of savings from 16th November.