First Direct to increase Isa rates
First Direct is increasing the interest it pays on its cash Isa from November this year. However, not all of its customers stand to benefit.
The First Direct Isa pays a tiered rate, which currently starts at a less than impressive 0.5% on balances up to £4,999, rising to a market leading 3% on balances of £40,000 or more.
From 1 November, the bank will increase the rate on balances up to £4,999 from 0.5% to 1.3%. The rate on balances from £5,000 to £9,999 will rise from 1.2% to 1.5%.
But savers with £10,000 more on deposit won't enjoy any increases and could actually see their savings rate tumble.
First Direct is maintaining its rate of 1.7% on balances between £10,000 and £19,999 but savers with between £20,000 and £39,999 will see their rate fall from 2.2% to 1.85%, while savers who are currently enjoying a very competitive 3% on balances of £40,000 or more will see their rate crumble to 2%.
According to Andrew Hagger, independent savings expert from Moneycomms, this reduction will mean savers with a balance of £40,000 will see their interest fall by a third from £1,200 a year to £800.
And with competitor rates remaining so poor, savers will struggle to get a better return elsewhere. "There is nothing above 2% on instant access. Britannia Building Society is paying 2.25% on a two year deal or if you are prepared to tie your money up for five years Skipton Building Society is paying 2.5%," he says.
Sue Hannums, director of Savingschampion.co.uk, adds: "Rate cuts are not isolated to First Direct, but what makes this change so disappointing is that inflation proofing your savings just got near to impossible. Most savers will effectively be losing money in real terms on their cash, which is a desperate state of affairs."
Hannums points out the only account to beat inflation is a seven-year fix from Skipton, paying 3.5% but only on balances up to £10k,000. It's available online or in branch and is an ordinary bond, not an Isa.
Even though First Direct is raising rates for its less well off savers, Hagger says they can still get better returns elsewhere. "There is a whole host of providers paying 2% for instant access on £1," he says. These Include Tesco, Nationwide, Cheshire Building Society and Derbyshire Building Society.
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.