THE BIG FREEZE
As interest rates for savers plunge – to zero for some – we look at how to find the best deals
THE first half of this year was a ‘total wipe-out’ for savers, with rates falling and dismal new deals. But experts say the outlook is even more chilling. Here, The Mail on Sunday analyses the state of the savings market, what to prepare for next – and how to get a better deal.
SAVINGS rates are locked in a death spiral – with the relentless trimming of accounts that people rely on to help fund their retirement or build a nest egg for the future. There is little hope of this problem abating, as the Bank of England is widely expected to chop the base rate further – from its current low of 0.5 per cent where it has remained since March 2009. The Bank’s Monetary Policy Committee could act as early as this Thursday.
A more extreme threat of negative interest rates cannot be ruled out following a warning to 1.3million business customers from Royal Bank of Scotland, which also owns NatWest, about the possibility of having to charge for holding their cash deposits.
HSBC has indicated it could do the same, but it would only affect business customers who hold deposits in a foreign currency.
Santander, Lloyds and Barclays all say they have no plans to charge customers for cash deposits. The former two point out they constantly review rates, while Barclays says it plans ‘for every type of scenario’ and until something changes there is no point ‘fuelling confusion’.
A move to negative interest rates is seen as highly unlikely, despite the tactic having been used elsewhere in the world.
But any cut in base rate by the Bank of England will mean poorer deals for those with money to squirrel away.
Many savings accounts already offer rates well below 0.5 per cent.
Charlotte Nelson, of financial research company Moneyfacts, says: ‘Savers have been caught in an endless spiral of misery, with rates cut dramatically and falling to the lowest level on record.
‘A base rate cut to 0.25 per cent will only further savers’ pain.’
THE SCALE OF THE PROBLEM
CHEAP funding for high street lenders was delivered by the Bank of England in the summer of 2012. This meant banks and building societies no longer needed to rely on customers’ deposits to fund home loans. It had a devastating impact on savings accounts.
According to rate-watcher SavingsChampion, there have been 4,904 cuts to existing savings rates in the past four years.
In the seven months before funding for lending there were 22 cuts to existing account rates.
In the seven months that followed there were more than 459. Moneyfacts research shows the average Isa rate has fallen from 2.57 per cent five years ago to 1.14 per cent today. Anna Bowes, of SavingsChampion, says: ‘Banks and building societies don’t need an excuse to cut rates. ‘A third of easy access accounts pay 0.25 per cent or less – but your money does not need to sit in one of them. You can do better.’ Someone with £50,000 in an account paying a derisory 0.25 per cent can earn an extra £500 interest a year by moving to a 1.25 per cent easy access deal.
A MARKET UNDER SCRUTINY
THE City regulator, which has been investigating the savings market, recently produced a long list of easy-access savings accounts that pay the lowest rates – from nothing to 1.5 per cent.
The Financial Conduct Authority’s study also revealed accounts opened a long time ago pay lower rates than those set up more recently – yet many savers do not switch to a better offer, even with the same provider.
Half of providers on the regulator’s list pay 0.1 per cent or less on accounts that are managed inbranch and no longer available.
From December this year provid-
ers will need to summarise key information in letters to customers – in a way that helps them to compare accounts – and include reminders about forthcoming rate changes.
HOW TO GET A BETTER RATE
LOOK at challenger banks, the name given to smaller banks trying to take business from bigger rivals. Many – including RCI Bank, Charter Savings Bank and Virgin Money – top the charts for savings.
But if their accounts become too popular they will not be available for long. RCI Bank savings are protected by the French version of our State-backed protection scheme, guaranteeing £75,000 per person, per firm.
SavingsChampion’s free ‘rate tracker’ service alerts customers when there is an account that beats their current deal.
Anyone with £100,000 or more in savings could consider the company’s ‘concierge’ service, which takes on all the hassle of switching accounts. There is a one-off fee of 0.1 per cent to set up, followed by a 0.2 per cent annual fee.
Many current accounts are also winners for savings rates. But they require minimum sums to be paid in each month and at least two direct debits paid out for bills. Fees might also apply.
Be aware that most interest rates on current accounts are variable, and therefore subject to change.
People who are reluctant to switch – or fear it is too much trouble – should at least contact their existing provider to see if it can secure them a better rate from a different account.