Sudden fall in savings rates
Savers have been hit with a sudden fall in interest rates, with many of the top deals being pulled by providers.
The first six weeks of 2010 have proved disastrous for savers, with the average rate of the top five savings accounts plummeting to just 2.89% from 3.04% at the turn of the year, according to research by moneysupermarket.com.
For example, Scottish Widows Internet Saver – which was one of the best instant access deals on the market – recently saw its rate drop from 3.01% to 2.7%. Coventry Building Society, meanwhile, has relaunched its easy access account with a rate of 3.15% - down from the previous rate of 3.3%.
In total, eight of the top 10 deals have seen their rates fall or been pulled completely – despite the Bank of England base rate remaining at 0.5%.
At the same time, inflation has started to rise, hitting 2.9% in December. This means basic-rate taxpayers currently need an account paying at least 3.63% to offset the impact of inflation.
Kevin Mountford, head of savings at moneysupermarket.com, says: "This sudden fall in savings rates will have caught many by surprise, and coupled with December's unexpectedly sharp rise in inflation means 2010 looks like it may be a difficult year for savers.
"These moves seem to suggest things won't be getting much better in the near future for this marginalised group.”
According to Mountford, savings rates peaked in mid-October last year.
“With best-buy savings deals being pulled on a increasingly frequent basis, the rate-cutting strategy used by the Bank of England to restore economic stability 12 months ago is continuing to hit UK savers hard,” says Andrew Hagger, spokesman for comparison website Moneynet.co.uk.
He adds that savings rates are unlikely to start rising until the Bank of England base rate does.
Unfortunately, earlier this week the Bank of England hinted that interest rates likely to remain very low for some time. In its quarterly inflation report, the central bank admitted the economy would take longer to recover than expected. It also forecast that inflation – despite having risen in recent months – would remain below target in the medium term.
Even if rates do rise slightly this year, then there is no guarantee that savings providers will pass this on.
Hagger believes many will use the opportunity to restore their profit margins.
“It's understandable that people are angry and frustrated with the current situation, but no matter how much noise they make, neither providers or the government are in a position to offer beleaguered savers a quick fix,” he adds.
Mountford, meanwhile, says people looking for a short-term home for their money until things improve need to act quickly: “With the best deals disappearing daily, it's vital consumers keep an eye on the best buy tables and check the small print behind any good rate advertised, especially in the run-up to this year's ISA season.”
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.