Act fast on savings deals
As banks and building societies are awash with cash, act now for the best deals
IN THE days and weeks running up to last week’s European Union vote, cash was the only currency in town. Nervous investors who feared Armageddon on the stock market switched in droves to deposits as one of the safest havens for their money – even though rates on savings accounts are at historic lows.
The flight to safety ahead of the referendum means the biggest providers are so awash with cash they have little need in the near future to lure new money with attractive savings rates.
Savers keen to snap up a decent fixed rate on their money will need to act fast as the best deals are likely to be withdrawn imminently.
The evidence that deals can only worsen comes from action on the other side of the coin – with recent cuts to fixed rate mortgage deals. Some one-year fixed rate loan deals are as low as 0.99 per cent.
Like fixed rate savings these loans are priced on money market rates, linked to yields on gilts – or Government bonds – which have tumbled to record lows. At the same time lenders are desperate to attract borrowers and are even underpricing their offerings, according to mortgage experts.
The trend for cheap fixed rate mortgages suggests current fixed rate savings bonds – including five-year deals paying as much as 2.35 per cent per annum – are likely to vanish. What will happen to variable rate savings deals, which are linked to the movement in bank base rate, is less clear.
Calum Bennie, savings expert at investment group Scottish Friendly, says the direction interest rates will move will depend on the performance of sterling on the currency markets.
He says: ‘If sterling needs to be propped up by increases in interest rates this could result in higher mortgage and savings rates. ‘On the other hand, if the economy falters, the Bank of England could leave interest rates at their current all-time low or reduce them further to try to stimulate the economy.’ Scottish Friendly publishes a ‘disposable income’ index, which even before the referendum revealed that households are squeezed with fewer people putting money aside into savings of any kind.
Holly Mackay, of website Boring Money, says: ‘If the Bank of England needs to shore up confidence, we could see even lower rates. It looks likely to be a gloomy time for savers.’
Sue Hannums, of website Savings Champion, agrees. She fears that even if bank base rate were to rise, the fact banks and building societies are awash with cash could depress savings rates for some time to come.
She says: ‘Savings rates have been on a downward spiral since 2012 while the base rate has remained static at 0.5 per cent for more than seven years. This would make you believe that providers no longer need a cut in the base rate to lower rates again and again.’
Even if savings rates were to rise, savers are likely to see their returns eaten away by rising inflation. Economic forecasts for the post-referendum world suggest inflation could rise to between 2 and 4 per cent by 2018, reducing the spending power of cash considerably.
ACTION PLAN
CASH should be the bedrock of anyone’s savings strategy – and all savers can make their cash work harder, even against a backdrop of declining rates.
Research by Savings Champion indicates inertia is the biggest danger for savers. Hannums says: ‘You need to actively manage your cash so it can hold its own. According to a
Financial Conduct Authority cash market study, 80 per cent of easy access accounts have not been switched in the last three years. The longer you hold your account, the more likely you are to see the rate reduce and as a result some savers will be sitting in accounts paying as little as 0.01 per cent.’
It is possible to boost returns significantly by switching from accounts paying derisory rates to even the best easy access deals – see the table, left, for ideas about where to shift your money. Since nce April most people can an now earn their savings ings interest tax-free ree with the introoduction of the Personal Savings Allowance. Basic rate taxpayers can earn up to £1,000 in savings income taxfree, while higher rate taxpayers have e a £500 allowance.e. Additional rate ate payers do not getet the allowance.
The allowancence looksl ooks attractive now but if interest rates rise sharply in future, savers will soon breach it. This is why it is also worth considering a tax-friendly Isa.
Everyone over age 16 can save up to £15,240 in an Isa in the current tax year. The attraction of an Isa is that all interest is free of tax and by maximising the allowance each year, if they can afford it, savers can quickly build up a significant nest egg.
The beauty is that this Isa cash remains tax-free. Even though rates are pitiful now, when they recover in the future the tax-free benefits become more valuable, especially for those who have salted away decent amounts.
PROTECTION
THE Brexit vote sent shockwaves through markets, sparking fears that financial institutions – and consumers’ savings – could be affected. Mackay sa says there is no need to b be alarmed. She says: ‘This is a different scenario to 2007 an and 2008 and the L Lehman Bank c collapse that sparked the financial crisis. For now, savers have no new reasons to worry. We are still in the European U Union and the ca cash in our bank acc accounts is protecte tected by the British Gover Government.’ Even if economic turmoil does ensue, savers should not fret unduly. They can be reassured that a crucial protection – the Financial Services Compensation Scheme – remains in place. Although this guarantee is a European Union rule, Europe only lays down the amount that is protected. It is run by the UK’s Financial Services Compensation Scheme and protects savings of up to £75,000 with a bank or building society – or whole group – and is likely to continue in some form even when the break from Europe is completed.