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February 15, 2008 4:59 pm
Most savings accounts face interest cuts after this month’s base rate reduction to 5.25 per cent, but continuing competition for deposits may limit the pain for savers prepared to move their cash.
However, rather than simply chasing the highest rates – which are still above 6 per cent – experts say savers should also consider limiting their exposure to individual banks, particularly high-
paying overseas institutions.
Most banks and building societies have yet to an-nounce by how much they are reducing their savings rates following the Bank of England’s latest cut of a quarter of a percentage point.
Among the cuts announced so far, those coming down by the full quarter point include Icesave’s Easy Access ac-count (to 6.05 per cent), Bath and Chesham building societies, and a range of base-rate related deals, including National Savings Direct Isa, according to Moneyfacts, the rate monitor. Egg has knocked a chunkier half a percentage point off its internet savings account, giving a new rate of 5 per cent.
But some accounts, in spite of being variable-rate, are sparing savers. Kaupthing Edge, the new online arm of an Icelandic bank, has said it will not be reducing its top-paying 6.5 per cent instant access account. Cahoot is also maintaining rates of 6 to 6.2 per cent on balances of £250,000 to £1m.
Moneyfacts says it expects most savings rates to come down by up to a quarter of a percentage point in coming weeks. Some banks might delay detailing their cuts until late this month for fear of putting off new savers.
But with competition re-maining intense, there are still likely to be attractive returns around.
Since the credit squeeze took hold last year, banks and building societies have sought to raise more funding from retail deposits, resulting in “artificially inflated” rates for savers, says Kevin Mountford, head of savings at comparison service
Moneysupermarket.com. Best buy rates are now far higher than when base rates were last 5.25 per cent a year ago, as the table shows.
“Providers are still desperate to attract savings,” Mountford says, adding that in the short term this should also benefit savers looking to take out cash Isas ahead of the end of the tax year.
Even assuming another cut in base rates to 5 per cent – a move expected in coming months – savers may still be able to find accounts paying 6 per cent, he says.
However, Mountford also warns of a growing gap in the savings market, with older accounts that are no longer actively promoted offering increasingly poor returns.
Rival comparison service Moneyexpert.com has found that the average instant access passbook account pays just 3.84 per cent on a balance of £1,000, with just eight passbook accounts paying more than 5 per cent.
Experts say savers looking to protect returns by locking in to fixed rates need to be prepared to move quickly to snap up the best offers.
Fixed-rate bonds that even after this month’s base rate cut were offering up to 6.75 per cent are being withdrawn and replaced by less attractive deals at about 6 per cent or less, says Moneyfacts.
Even so, savers may be less inclined to fix their rate in the light of suggestions that the Bank of England might not cut base rates as quickly or as far as previously thought, due to fears of resurgent inflation. Economists now expect rates to fall to 4.75 per cent over the next year.
David Black, principal banking consultant at Defaqto, personal finance analysts, says that while it remains very easy to find savings returns above the base rate, account holders do need to be prepared to move their money to take advantage of them.
Savers looking for new accounts may be struck by the range of foreign-owned banks, particularly Icelandic (Icesave and Kaupthing) but also Indian (Icici HiSave) and Nigerian (FirstSave), among the top payers. A number of experts think that many of these new entrants are likely to continue to offer good rates because of the need to build credibility among depositors. Black says savers can expect such accounts to remain “ultra-competitive” for at least a few months.
But savers may also wonder about the risks of these institutions. Being foreign- owned is not in itself a problem, because for banks authorised in the UK to accept deposits, savers are covered by the industry’s safety net, which protects the first £35,000 of their money. However, Moody’s Investors Service, the ratings agency, has raised concerns that Iceland’s banks could be fragile. And were a foreign bank to crash, Mountford says it could take longer for UK savers to get their money back because of the involvement of home-country compensation authorities.
Experts suggest that, especially in the case of foreign banks, it may make sense to limit deposits to £35,000. Mountford, referring to the rescue of Northern Rock savers, says: “I can’t imagine the government would be as keen to bail out an overseas bank.” If savers can achieve the same rate without investing with an overseas bank, they should go with the UK institution, he says.
For complete peace of mind, says Black, savers should have no more than £35,000 with any institution, even a UK one. Mountford says sticking with the big blue-chip providers such as Halifax (still offering up to 6.35 per cent this week) should give added comfort.
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