The notion of ‘putting something away for a rainy day’ seems a bit ridiculous if you’re British. Given the infamous climate we’ve become accustomed to, dipping into the reserves every other day certainly isn’t conducive to building up much of a nest egg.
Yet we remain a nation of savers nonetheless. The UK’s personal savings total more than £1 trillion, according to official figures, and that doesn’t count stocks and shares investments, nor ceramic pigs and giant empty whiskey bottles. And we seem more committed than ever to the cause – a recent survey reported ‘saving more money’ as Brits’ most popular New Year’s Resolution for 2013, with a 31% share of more than 1,600 respondents.
Yet it really is a tough market out there at the moment. Savers have been one of the hardest groups hit by the knock-on effects of the enduring economic downturn. Rates are low, the choice of products is getting narrower, and the outlook looks challenging for the foreseeable future.
The primary reason for this is that government has taken steps to grease the wheels in the borrowing market, and this has had a negative impact on savers. Unfortunately, money tied up in savings accounts does little to kick start the economy – instead, it requires people to spend in shops and on property to get money moving through businesses, which in turn creates reinvestment, taxes and employment as it flows.
With that in mind, the Bank of England (BoE) has reduced its base rate to a record low of 0.5 per cent to make it cheaper for banks to borrow money. It is hoped they can then pass the cash on at affordable rates through mortgages and personal loans. Furthermore, to the same end, government has introduced a scheme called Funding for Lending which allows the high street banks and building societies to borrow from BoE banks at even lower rates, as low as 0.25 per cent.
But, as stated, borrowers’ gain is savers’ loss. The banks are not under pressure to source money from individuals to lend on, meaning they do not need to offer attractive rates on their savings accounts. Indeed, since it’s so cost effective to borrow from BoE, the banks have removed many savings products from the market altogether and have dropped the rates significantly on the ones that are left.
With the Funding for Lending scheme set to run until at least the end of January 2014, and economists tipping the base rate to remain at its record low for years to come, we should expect a difficult market for savers throughout the whole course of the year and probably beyond.
Where we stand
So what effect has this actually had on the way that the saving market looks today? Well initially it makes for bleak reading, but you’ll be pleased to hear that there are still some relatively good deals out there. We’ll explore those shortly, but let’s get the bad news out of the way first.
The total number of savings accounts on the market fell by 15% throughout 2012, to a total of just over 2,000 individual products.
According to MoneyFacts, the total number of savings accounts on the market fell by 15% throughout 2012, to a total of just over 2,000 individual products across all of the banks, building societies and specialist lenders, including the likes of NS&I (National Savings and Investments) and the Post Office. Of these, only 1,255 pay above the base rate of 0.5 per cent.
The Bank of England itself did a study of the market recently and found that the average instant access savings account currently pays a measly 0.48%. Additionally, the average cash ISA (as opposed to the stocks and shares option) pays a mere 1.27%.
Accounts which pay a bonus if you limit your withdrawals have been popular historically, rewarding the financially prudent that manage to get by without dipping into their reserves (clearly taking no notice of the old rainy day adage). But MoneyFacts highlights that these are one of the main victims of the contracting market place. The instances of this account type have almost halved over the last two years, from just shy of one in five (19%) of all accounts at the beginning of 2011 to just one in nine (11%) today. Those that are left have depreciated too, with the best bonus on offer now just 2%, where 3% was available 24 months back.
There’s bad news for fixed bonds too. Accounts where you tie your money up for between one and five years were historically lucrative, compared to their instant access cousins, but even the best rates available on these currently come in only at around 2.5%.
Put into context against the rate of inflation, these trends are concerning to say the least. The increase in the costs of the items we buy in our everyday lives has been steady for the last few months at 2.7%, but has been as high as 3.5% at points over the last year. If your money is in an account that pays less interest that the rate of inflation, it is technically devaluing – it will buy you less and less as time goes on.
And while the New Years’ resolutions polls show Britons have the best of savings intentions for the year ahead, the market research appears to show that the poor conditions are turning people off. NS&I reported in its most recent Quarterly Savings Survey, released in December, that a full one in four people are not saving anything at all each month. This is up from 21% in the previous quarter and 19% in the autumn of 2011. The fact that those that do save are squirreling £90 per month now, up from £87 per month in July, provides little consolation. It’s certainly not hard to see why the organisation found that 62 per cent of us are unhappy with our current levels of savings.
Diamonds in the rough
All the same, as promised, we can point you in the direction of a few areas that might still provide a fairly healthy return on your investment.
Regular savings accounts were once highly lucrative across all of the banks and building societies and some remnants of that ethos remains in the market. By putting aside a set amount each month into the account, you can earn a comparatively huge 8% with First Direct (though a current account with the bank is needed); between 4% and 6% with HSBC (again depending on which of the bank’s current accounts you have) and 5% with both Cheshire and Derbyshire.
Remember with a regular savings account that you’ll technically only earn the full interest rate on the first payment. On the second you’ll earn 11/12ths, the third 10/12ths and so on.
We mentioned earlier that fixed term accounts no longer enjoy the premium rates that they used to. Nonetheless, if you wanted to put your money aside in order to plan effectively for your future, the Vanquis Bank 5 Year Fixed Rate Bond might be a good deal to explore. You can find that on Know Your Money’s comparison tables here.
Tax free savings
If rock bottom interest rates weren’t bad enough, the reminder that you have to pay tax on them at the same rate as your income tax will only serve to twist the knife.
However, we remind you that you can invest up to £5,640 per year and earn tax free interest through a cash ISA. Furthermore, the limit will be increased to £5,760 when the new tax year begins on April 5.
As for some of the best deals out there, Coventry Building Society appears to be leading the pack with an offer of 3.1 per cent, including a 0.6% annual bonus, on its 60 Day Notice ISA.
Beyond this, the Advantage Cash ISA from Marks & Spencer currently offers 2.75% AER, but you’ll have to be quick – it will close to new applicants from January 21. When the new tax year comes around, the rate will drop to 2.25%
While most of the decent bonus accounts have disappeared, the Post Office offers a fairly good bet with its Instant Saver product. The 2.1 per cent initial interest rate is backed up by an annual bonus of 2%. Beware though, after the product matures on its first year anniversary, the rate drops to 0.1 per cent. You’ll need to find a new deal at that stage.
Such is the market at the moment, the rates we’ve listed here aren’t likely to have set your world alight. But at the very least they cover the rate of inflation and earn you something in addition. If you are looking for a better return than you can get with easy access savings accounts, you may need to consider investments. A good place to start would be with your investment ISA allowance - £5,640 this financial year, £5,760 from April, as with the cash ISA. You can find details of some leading investment ISAs on Know Your Money’s comparison pages here. For other investment plans, visit this page.
With returns continuing to fall, it is more important than ever that you review your savings accounts and check whether once handsome interest rates have since fallen off a cliff. Request a meeting with your bank to make sure they are offering you their best deal and then shop around. Remember there is specialist advice available to help you manage your account portfolio if you need it.
Know Your Money wishes you all the best for your savings strategy in 2013, and we’ll be bringing you the latest updates on the market as they arrive.
Author: KYM Editor