14th April 2013
Anna Bowes director of savingschampion.co.uk gives her assessment of the prospects for savers.
The savings landscape is looking pretty desolate at the moment, but with no obvious alternative for those who need to keep their money accessible and secure, it’s important to use all the tools in the armoury to ensure you are earning the best rates possible, to try to win the battle against inflation.
Five years ago, the base rate stood at 5.25%. Having peaking at 5.75% in July 2007, it continued to fall until 5th March 2009 when it hit its current level of 0.50%. At the same time, inflation (Consumer Prices Index – CPI) has been generally running above its 2% target for years and is currently standing at 2.80%. Your personal inflation rate could be even higher!
If the fall in the base rate wasn’t bad enough for savers, just when we were getting used to so called “best buy” rates at around 3%, worst was yet to come with the devastating impact of the Funding for Lending Scheme (FLS).
The FLS was launched to help borrowers in these tough times but it had a knock on effect for savers. Providers’ appetites for raising money from savers, has all but disappeared and this has been reflected in the interest rates being offered. Currently rates among the top 5 easy access accounts have dipped below 2%; suggesting that these rates are “competitive” is a struggle even for us at savingschampion.co.uk, let alone how those savers relying on their income must feel.
To put it into context, rates available on the best buy easy access accounts have fallen by 38% since last summer, from 3.25% AER to around 2% AER (see the graph below) – so for those who depend on their interest to supplement their income, once the bonuses on their savings accounts end, they are going to have a real shock.
Those with fixed rate bonds coming to an end will also really struggle to make ends meet. The best 1 year fixed rate bond was offering 3.30% a year ago – which would mean interest of £3,300 before tax on an investment of £100,000. Today, the best rate is 2.25% – a drop of over 30% – and in income terms that is £1,050 less (before tax)!
How much more pain will savers have to endure? We’ve already suffered hugely following the introduction of the Funding for Lending Scheme and more recently there was a suggestion of negative interest rates, which seems to have abated for the time being at least.
In order to fight the battle against inflation, savers need to keep a close eye on the rates of interest they are earning and switch when appropriate. The main reason we launched our free Rate Tracker service was that providers often don’t clearly inform savers when their interest rates are changing, how competitive they are and what better rates are available. Little did we know that the FLS would exasperate the problem, meaning that no savers are immune from their rate being slashed.
Existing savers have seen cuts of up to 2.50% in the last 6 months and the cuts continue with over 400 accounts being hit so far in 2013, even though the Bank of England base rate has remained unchanged for more than four years. Savers simply can’t afford to remain complacent.
As the graph below shows, a couple of providers have bucked the trend recently and we’ve seen a small upward movement in the best buy easy access account. Whether this a new trend or whether it’s simply a blip, it’s still too early to tell. We can just cross our fingers and hope that some good news for savers is over the horizon.
SavingsChampion.co.uk Savings Index
This chart shows the average of the SavingsChampion.co.uk top five best buy easy access accounts.
SavingsChampion.co.uk is a website dedicated to savers and savings accounts. We wanted to produce a straightforward, straight talking savings site that is totally independent, which looks at the whole of the UK market. As well as unbiased best buy tables, it offers a variety of tools to help savers to find the best rates and keep the best rates forever.
Rate Tracker is a free service that will inform you when your savings rates change, even if your provider doesn’t. We will also remind you when bonuses are due to end, or fixed rate bonds are due to mature and tell you the best rates at that time from the whole of the UK savings market.
The Concierge Service builds bespoke savings portfolios for savers with £100k or more, spreads the risk by dividing money between FSCS banking licences so your money is always protected and manages the administration hassle. The firm says it provides on-going advice to ensure you are always getting the best rates and are in the right accounts for you needs.