Regulator names savings providers that pay 0% interest
Savings providers offering the lowest interest rates to savers in easy-access cash and individual savings accounts (Isas) have been named by the Financial Conduct Authority (FCA).
This is the regulator’s ‘sunlight remedy’, which aims to embarrass providers into offering better interest rates for closed account customers, by shining a light on firms’ strategies towards their long-standing customers. The data is based on rates as at April 2016 and shows that some accounts pay 0% interest.
Providers that should be most embarrassed include the Post Office, which the FCA says pays absolutely nothing to both open and closed account holders.
A Post Office spokesperson said: “All our savings accounts are offered with an interest rate of at least 0.1%. The FCA report gives the impression that we have had a 0.0% rate, but it is important to emphasise that this is not the case. This relates to some of our products that require a minimum £500 deposit and where we make clear to customers that they will not be eligible for interest if the amount in the account falls below £500.
“More broadly, our rates are open and transparent in our literature, we are very clear with customers about what their rate is and will be, and we regularly feature in best buy tables, confirming our competitive position. While some of our customers are on a rate of 0.1%, they will have benefited from a guaranteed bonus for at least 12 months. We write to all customers about a month before the end of the bonus rate to let them know what their rate will be changing to and offer a full range of savings products so that customers can take out the product that best suits their needs.”
Meanwhile, M&S Bank, which pays 1.3% to open easy-access cash Isas that can be managed in branch but just 0.05% to similar accounts that are closed.
What should savers do?
Christopher Woolard, director of strategy and competition at the FCA, says: “We said that one of our priorities this year will be focused on the treatment of long-standing customers. Our new rules, coming into force at the end of the year, will help consumers get the facts they need to make an informed decision about what to do with their savings.
“In a well-functioning market, providers should be competing to offer the best possible deal to consumers. Our sunlight remedy data shows that some consumers could be better off by opening a different account.”
In response to the findings, analysts at Hargreaves Lansdown have put together a five-point action plan for savers:
1. Pay down debt
The cost of borrowing is almost certainly higher than the returns from your cash savings.
2. Shop around
Some closed accounts pay no interest and often significantly lower interest rates than open accounts. Shopping around and then switching should improve your returns, in some cases more than 10 fold.
80% of people with easy-access accounts haven’t switched over a five-year period, according to the FCA, and yet this is often the best way to improve the returns on your cash. Cash Isa accounts can be switched to a new provider in 15 days or less.
3. Use your tax breaks
Fully utilise your tax free personal allowances and the new personal savings allowance of £1,000. Combine these and a basic rate taxpaying couple can receive £24,000 in income and interest this tax year, completely tax-free.
4. Use Isa allowances
An individual savings account (Isa) shelters interest from the taxman and this can improve your overall returns. Even with the new personal savings allowance, using your Isa £15,240 allowance is good tax saving discipline.
Certain types of Isa have other benefits: the Help to Buy Isa provides a 25% government bonus to first-time buyers when they buy a property. From April 2017, the Lifetime Isa will also provide a 25% bonus to savers under 40 either to help first-time buyers onto the property ladder or for longer term retirement savings.
5. Consider switching some long-term savings from cash to the stock market
It’s important to hold some cash, but not too much. While income from a £10,000 cash deposit has fallen by 86% since 1996, dividend income from a popular equity income fund has remained steady. However ,when you factor in the growth in the capital value which in turn grows the dividends, the income has increased by 268% (and the capital increased to £39,930).
Income over 20 years from £10,000 starting capital
|Year||Income from equities with capital growth||90 Day Notice|
|Total income taken||£16,328||£5,632|
Source: Lipper, Invesco Perpetual High Income fund vs Moneyfacts 90 Days Notice Cash Account
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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 interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.