Turbocharge your savings

CASH savers have never had it so bad. Rate cuts are coming thick and fast while inflation continues to erode their returns. Personal Finance Editor JEFF PRESTRIDGE assesses the state of the market and looks at how savers can give their savings a boost.

WHERE WE ARE

SINCE the base rate was cut from 0.5 per cent to 0.25 per cent earlier this month, more than 50 banks and building societies have announced rate reductions on selected savings accounts. A dozen have already trimmed rates while most of the remainder will reduce interest payments from the start of next month on Thursday.

Anna Bowes, of rate scrutineer Savings Champion, says cuts are happening at a ‘ferocious pace’. She adds: ‘Since the start of the year, we have recorded nearly 1,600 rate reductions across the savings industry and there is no end in sight to the carnage. We have even been notified of cuts that are happening in December.’

Small and large providers, banks and building societies, have all chopped away. Cuts have ranged in depth – from the 1.5 percentage point reduction to be applied by Santander on its popular 123 account to minuscule reductions of 0.04 per cent elsewhere.

Bowes says: ‘For savers, it’s not the size of cut that is important. It’s where the interest rate ends up which is crucial.’

For example, Coventry Building Society will reduce rates on its accounts this Thursday by between 0.05 and 0.4 percentage points. Yet it still means that most Coventry savers will be getting an interest rate superior to that available from other providers – in some cases 1.85 per cent, 1.75 per cent or 1.25 per cent.

By contrast, building society Hanley Economic will cut the rate on its instant access account this Thursday by between 0.04 and 0.05 percentage points, yet it means the rates it is paying now start from a pitiful 0.01 per cent, rising to 0.3 per cent on balances above £100,000.

Some of the reductions applied by providers have turned once highflying savings accounts into accounts that savers should now flee from.

BM Online Extra (Issue 18) is a savings account run by a brand owned by Lloyds Banking Group. A year ago it was paying savers who kept at least £1,000 in the account annual interest of 1.6 per cent, a rate buoyed by a bonus. Today, the rate is 0.25 per cent.

Similarly, savers in Barclays’ Direct Access Plus account (Issue 2) were receiving one per cent interest until they were transferred into Everyday Saver as part of the bank’s simplification of its savings range. This account pays 0.25 per cent but the rate will be reduced to 0.05 per cent at the start of December. To put these numbers into perspective, the best equivalent account is from RCI Bank which is paying new savers in its Freedom Savings Account 1.2 per cent interest. ‘Interestingly, a year ago RCI Freedom was paying the best easy access rate of 1.65 per cent,’ says Bowes.

SWITCHING

TRANSFERRING money from one savings account to another is not as straightforward as changing current account or moving cash in a tax-free Isa to get a better rate.

With a current account or Isa switch, your new provider does all the work. With other cash savings, it is more laborious. You have to wait for the money from your old savings account to be transferred to your bank, then set up the new account.

Perseverance will pay. Someone with £10,000 in an easy access account paying 0.25 per cent interest will currently be earning a meagre £25 in annual interest. By saving the same sum instead in an RCI Bank Freedom account, they can boost their annual interest by £95. The more savings you have tucked away in poor saving accounts, the bigger the opportunity to improve your interest payments (see table above).

CURRENT ACCOUNTS

A NUMBER of banks and building societies offer interest-paying current accounts that provide a real alternative to a traditional savings account.

Accounts include Bank of Scotland Vantage, Club Lloyds, Nationwide FlexDirect, Santander 123 and Tesco Current Account. Savers need to be aware that interest is often restricted to a limited balance, monthly fees may be payable and account conditions need to be adhered to – a minimum monthly deposit, for example and the setting up of direct debits.

Santander is the only bank so far to adjust current account rates in response to the latest the base rate reduction. From November, it will be cutting its interest rate in half, from 3 to 1.5 per cent, for those with balances between £3,000 and £20,000. It means that on a balance of £20,000, savers will earn £300 of annual interest. This will be reduced by monthly fees equivalent to £60 a year, effectively providing savers with an interest rate of 1.2 per cent – matching the rate on the best easy access savings account from RCI Bank. But Santander 123 customers will also receive cashback on certain bill payments and be offered preferential Isa rates from time to time.

Bowes says: ‘An interest rate cut for Santander 123 customers was on the cards. A 50 per cent reduction is a shock and will be a bitter disappointment for many customers. But most will stay put because it still remains a competitive account, especially if you are using the cashback facility.’

TAX EFFICIENCY

MOST savers can now protect their interest payments from the taxman. Since April, a new personal savings allowance means basic rate taxpayers can earn £1,000 in annual interest without it being taxed while higher rate taxpayers have a £500 tax-free allowance.

So, a basic rate taxpayer could deposit £83,333 in RCI Bank’s Freedom Access account and earn £1,000 in interest while a higher rate taxpayer could deposit £41,666. For someone saving in the best one-year fixed rate savings bond with Charter Savings Bank, the respective figures are £68,493 and £34,246.

Cash Isas provide long-term protection from tax. Currently, the maximum annual amount that can be saved is £15,240.

On fixed rate Isas, best rates over one, three and five years are 1.25 per cent (Buckinghamshire Building Society), 1.5 per cent (Paragon and Shawbrook) and 1.7 per cent (Shawbrook).

Rachel Springall, of financial data scrutineer Moneyfacts, says: ‘Some savers think that the new personal savings allowance has made cash Isas redundant but I don’t agree. There is no guarantee the personal savings allowance will last forever. Isas are far from being dead in the water.’

TRACKING

SAVINGS Champion offers an independent service for all savers. Its free ‘Rate Tracker’ service tells you if you are on a good deal and when or where to move your money as rates change.

The company also provides a fee based ‘Concierge Service’, which does the hard work for you. The online and phone-based firm (0800 010 6007) takes care of the research and paperwork needed to move your cash to a better paying deal – only your approval and signature is needed. You still have a direct relationship with each bank and accounts remain in your name.

Savings are distributed between accounts to ensure every penny is protected by the Financial Services Compensation Scheme.

An initial one-off fee of 0.1 per cent of savings applies, plus a yearly fee of 0.2 per cent, charged quarterly.