Savers squeezed by falling interest rates

Cash savers are still being squeezed by falling rates on deposit accounts and by rising rates of inflation.

Interest rates paid on the top instant-access accounts have drifted down to 3 per cent or less this year, even though the Bank of England base rate has now remained unchanged for a near-record 15 months – and one-year fixed-rate bonds offer only a minimal extra return.

Meanwhile, new research has found that about a third of all variable-rate savings accounts are paying just 0.1 per cent or less, particularly on low balances.

“There’s still competition, but not so many providers playing in a space,” said Kevin Mountford, head of savings at the price comparison service Moneysupermarket.com.

He suggested that banks and building societies either couldn’t afford to pay the higher returns offered last year to attract cash because they weren’t lending at sufficiently high margins, or they had already raised the funds they needed.

This week saw inflation – as measured by the retail prices index (RPI) – hit a 20-year high of 5.3 per cent, further reducing the value of already low savings rates. At this level of price rises, it is now virtually impossible to earn a positive after-inflation return from a cash account.

Currently, the highest available instant-access rate is 3 per cent from Coventry Building Society’s 1st Class Postal account. Notice accounts and one-year fixed-rates will pay up to a fraction of a percentage point more, although higher rates of 4 per cent-plus are generally only available for locking up cash for two years or longer in a savings bond.

“There’s very little incentive to tie up cash in a short-term fixed rate,” said David Black, savings analyst at research firm Defaqto.

Justin Modray, founder of financial guidance website CandidMoney.co.uk, added: “It’s better to forgo the extra 0.1 or 0.2 percentage points to retain access and wait for a better deal.”

For many savers, however, 0.1 per cent is all they earn. CandidMoney’s latest research shows that a majority of the variable-rate accounts at the big banks are now paying 0.1 per cent or less – particularly on low balances, but often also on much higher sums.

Lloyds TSB has 17 different accounts paying these ultra-low rates – nearly two-thirds of its account range – the research found, while 20 out of 34 of Barclays’ different accounts pay similarly poor rates.

“These are the very worst, but there are many more accounts paying little more,” Modray said.

Across banks and societies generally, around one-third of all variable-rate savings accounts are now paying 0.1 per cent or less, while nearly half are paying 0.25 per cent or below, according to the website.

With such low rates cross-subsidising the higher returns that banks and societies pay to attract new deposits, Modray said savers needed to “play the game” and be prepared to switch to competitive accounts with other providers.

One way to improve on the current best buys of 3 per cent is to lock up cash in longer-term fixed-rate bonds. Black highlighted the 4 per cent offered on a two-year bond by State Bank of India, in which savers are still protected by the UK’s safety net for deposits of up to £50,000.

But he advised not to commit to longer-duration bonds – where returns of up to 5 per cent fixed are available for five years – in case rates were to rise substantially.

Rates on the top individual savings accounts (Isas) are typically no higher than those on equivalent taxed accounts. But the tax-free status of Isas means their returns are more valuable, particularly for higher-rate taxpayers and those paying the new 50 per cent rate.

Another alternative is regular savings. Northern Rock this week launched an account paying 5 per cent fixed for one year with penalty-free instant access – but it only accepts deposits of up to £250 a month.