Savers’ relief as more accounts raise rates
Don’t celebrate just yet, but savings rates are finally rising. Amelia Murray looks at whether the tide has truly turned
Savers are seeing the first signs of a turnaround in the rates paid on their cash as a record proportion of new accounts are offering higher rates. While interest rates on the whole for savers are still falling – see graph – a number of small providers are boosting competition.
In the first 11 days of this year, there were 27 interest rate rises on new issues of existing accounts. This compared to just 15 accounts that had cut.
This is the first time that rate increases have outnumbered cuts since 2015, according to Moneyfacts, the savings advice site. This time last year, there were just 17 rate rises compared to 256 decreases.
However, savers should not just assume that their current savings rates will improve, especially if they are with one of the big banks.
Competition is intense among the highest-paying accounts, with providers jostling to be top of the best-buy tables.
Last week, The Post Office increased the rate on its easy-access Online Saver account to 1.01pc.
This made it the market leader, after moving ahead of accounts from National Savings & Investments, Tesco Bank and Leeds Building Society, which all offer 1pc.
RCI Bank then increased the rate of its Freedom Savings account to 1.02pc.
This week, little-known providers The Nottingham and The Hanley Economic building societies raised rates. The Nottingham increased the interest rate of its eSaver to 1.02pc and The Hanley launched a new version of its monthly income saver that pays 1.05pc.
Customers of The Hanley must have at least £25,000 to save.
While the rates offered by leading accounts are improving, the difference between the best rates is minimal.
For example, £25,000 saved in NS&I’s easy-access account earning 1pc would earn £250 in a year compared to £262.50 with The Hanley’s top account.
‘Any increase in savings interest at the moment is worth chasing
Notice accounts, which lock-up money for a period and pay higher rates, have also been in a price tussle.
Secure Trust’s 90-day account rose to 1.31pc, matching Charter Savings Bank’s 95-day account, while Swedish provider Ikano Bank has increased the rate of its three and four-year fixedrate bonds to 1.75pc and 1.95pc.
The market has not seen a four-year deal pay 1.95pc or more since August last year, when Vanquis Bank offered 2pc, according to Moneyfacts.
Atom Bank, the mobile-only bank, has also hiked rates. Its three-year account now pays 1.7pc, and five-year bond pays 2.05pc. Average savings rates have been following a downward trend since 2012, according to Bank of England data.
The average easy-access account paid 1.55pc when rates peaked in February 2012. In December 2016, this dropped to 0.15pc.
That’s the difference between earning £387.50 on savings of £5,000 a year – and £37.50.
However, while some providers are raising rates, many more accounts are still paying lower interest, said Anna Bowes from Savings Champion.
Ms Bowes said: “Six months ago, just 10 variable-rate accounts were paying 0.01pc. Now there are 33 accounts paying this paltry rate.
“This will soon rise to 35 as HSBC is cutting from January 25.”
What’s more, nearly 20pc of all easy-access accounts are paying 0.05pc or less. An account paying this rate would yield just £12.50 in a year based on savings of £25,000.
Despite the negative trend, Ms Bowes is hopeful that the “small improvements” seen at the top of the tables could lead to a “sustained battle” that will push rates up further across the board.
She said: “Any increase in savings interest in the current environment is worth chasing, especially if you are stuck in one of the worst paying accounts out there at just 0.05pc or even less.”
The Hanley Economic Building Society, 1.05pc. Downside: minimum balance £25,000.
Atom Bank and Ikano Bank, 1.4pc. Downside: the Atom Bank account is mobile-only and Ikano Bank does not subscribe to the UK’s Financial Services Compensation Scheme, which covers savings up to £75,000. Instead it subscribes to the Swedish equivalent and protects the same balance, but it may take longer to reclaim money.
Atom Bank, 1.6pc
Three-year bond: Variable cash Isa:
Ikano Bank, 1.75pc
NS&I and Penrith Building Society, 1pc. Downside: both providers only accept new Isa subscriptions – neither allows transfers. These Isas are also not “flexible”, meaning savers cannot make withdrawals and replace funds in the same tax year, without it affecting the annual £15,240 allowance.
One-year fixed Isa:
Al Rayan Bank, 1.09pc. Downside: This is an “target profit rate” and is not guaranteed. However, if the rate is not achieved, customers can redeem their money early with no penalty and will still receive the quoted interest for the duration of their investment. Alternatively, Bank of Cyprus UK, 1.05pc. If this account is accessed early a penalty charge equivalent to 180 days’ interest will be levied.
Two-year fixed Isa:
Aldermore Bank, 1.2pc. Downside: Access is permitted, subject to losing 180 days’ interest.
Three-year fixed Isa:
Virgin Money, Aldermore Bank, Paragon Bank, 1.25pc. Downside: Virgin Money customers will need to sacrifice 120 days’ interest if they need to make early withdrawals. For the Aldermore Bank account there is a huge loss of 270 days’ interest if accessing funds early.
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