Savers hoping to generate returns of 5 per cent from their savings are running out of options, following the Bank of England’s decision to reduce interest rates once again this week.
With the base rate now at 1.5 per cent, financial advisers expected the average rate of interest for both fixed and easy access savings accounts to drop over the next fortnight.
West Bromwich Building Society and Norwich Union have already passed on the rate cut in their tracker savings accounts, according to Moneyfacts.co.uk. ICICI, Lloyds TSB and Northern Bank all reduced variable savings rates and Buckinghamshire and West Bromwich building societies both withdrew bonds.
Banks and building societies have been steadily lowering rates on bonds and instant access accounts, leaving the average rate offered on bonds at 3.28 per cent.
This week the Indian-owned ICICI bank pre-empted the rate cut by removing its 12-month bond paying 5.1 per cent, leaving only the Close Brothers Premium Gold 2 account paying out 5 per cent to customers. But this account is available only to those customers who have deposits of £10,000 or more. The best rate open to cash investors with less than £10,000 is ICICI’s 12-month bond, which pays 4.65 per cent on deposits over £1,000.
For those unwilling to tie up their money, the market leading easy access account is the 4.89 per cent ING Direct Savings account. But this is only available to new customers, as it includes a bonus of 2.17 per cent bonus, fixed for the first 12 months. The account can be opened with just £1. Alternatively, Anglo Irish is still offering 4.55 per cent on its Deposit Issue 2 account. As this rate is variable, advisers said it is likely to be reduced soon.
Regular savers can earn interest of 6 per cent from Principality Building Society, but deposits are limited to between £20 and £500 per month, meaning it is not possible to obtain the interest rate on a large lump sum. Abbey has a regular savings account paying 5 per cent on monthly deposits from £20 to £250.
Savers looking to invest their money in a tax-free Isa will not find rates at the same level. A number of attractive cash Isa rates around 4.5 per cent were withdrawn this week, and the best rate currently available is 4 per cent from Manchester Building Society.
Advisers said anyone with cash on deposit should check what rates they are receiving and consider switching if they find they are in a low-paying account. The constant reductions to interest rates on savings have left many savers in accounts paying as little as 0.1 per cent.
Falling savings rates will have a particularly negative effect on those who rely on interest payments to supplement their pension. According to Life Trust, which provides income investments for people who live into their 80s and beyond, nearly a quarter of the population can no longer afford to retire at the time they had planned.
Ben Yearsley, investments manager at Hargreaves Lansdown, says many of those living off the income generated by cash investments are now considering switching to corporate bonds and equity income funds in search of higher yields.
Such investments are riskier than holding money in cash, and yields available increase in line with the associated risks. Gilt funds, which invest in government-owned bonds, are yielding between 3.5 and 4 per cent on average while investment-grade corporate debt is yielding between 5 and 7 per cent. For those who are interested in equity investments, Yearsley suggested the Jupiter Income fund, which offers 5.1 per cent.
However, for investors willing to take on more risk, there are even higher yields available. Corporate bond funds, which invest in bonds with a lower credit rating, such as Legal & General’s High Income bond fund, offer yields of between 9 and 11 per cent. Brokers said these are set to make up an increasingly important portion of investors’ portfolios in 2009.
