Savers in instant access accounts are now earning an average interest rate of just 0.17 per cent, according to new Bank of England data – leading many to save less, but others to consider shares and structured products.
Figures released by the Bank on Tuesday morning show that, by the end of February, the amount of interest paid on accounts requiring no notice for withdrawals had fallen to its lowest recorded level. A year ago, instant accounts paid 2.69 per cent on average, but six consecutive cuts to the base rate have reduced this by more than 2.5 percentage points.
Interest rates on tax-free cash individual savings accounts (Isas) have fallen faster - from an average of 5.06 per cent at the end of February 2008 to 0.96 per cent 12 months later. Fixed rate bonds have held up only slightly better – with the average rate falling from 5.21 per cent to 2.56 per cent.
Nationwide Building Society says that these rate cuts are causing some consumers to de-prioritise savings. Its latest research shows that the proportion of people who think saving is important has fallen from two thirds in July last year to just over half now. Following the recent rate cuts, 57 per cent of people say they believe it is bad time to save and fewer than one in five (18 per cent) think it is still a good time.
Andy McQueen, savings director at Nationwide, says: ”We’re very concerned that since we started monitoring the savings habits of the UK last year, the importance consumers put on saving has been falling. Interest rates have decreased but there are still a number of good products available paying a healthy return that people should be taking advantage of.”
But Barclays Stockbrokers believes low savings rates are prompting investors to take more risk. It reports that its Isa customers are taking “a bullish approach” to investing in equities in the next tax year. According to its new survey, 20 per cent of savers plan to invest more in a stocks and shares Isa in the next tax year, while 74 per cent intend to maintain their current levels of equity investment.
”Our research shows cash is no longer king,” says head of investment strategy, Barbara-Ann King. “Whilst interest rates continue to be low, informed investors are taking advantage of the potential long term returns from investments.”
In addition to shares, Barclays’ clients cited gilts & bonds, commodities, and structured products as holdings that they believed could deliver better returns.
Barclays Wealth’s latest structured product aims to address the problem of low savings rates by offering a monthly income option. Its new Regular Income Bond, launched this week, offers a fixed rate of income over a five year investment term, payable annually at 7.5 per cent or monthly at 0.615 per cent. But capital protection is dependent on the performance of the FTSE 100 index. If, during the life of the bond, the index falls by more than 50 per cent from the starting level and fails to recover by the maturity date, capital will be reduced by 1 per cent for each 1 per cent that the index is below the starting level.
Meteor, another structured product provider, is offering a alternative type of product for income seekers, called Cashcade. It invests savers’ money in a one-month notice pooled deposit with Rabobank, the Dutch banking group that carries a AAA credit rating from Standard & Poor’s. But savers can choose to receive either ‘traditional’ interest at a specific quoted rate, or ‘FTSE-linked’ interest, which will move in line with the index. Savers can switch from receiving one form of interest to the other at any time – and, if opting for FTSE interest, can ‘lock in’ rises and end the plans link to stockmarket, to protect against future market falls.
