At a time of year when the hangover of Christmas expenditure is still lurking menacingly on credit cards, savers need a cut to the interest rates on current and savings accounts like a hole in the head.
Among the providers that have already sliced their rates this month are Nationwide, NatWest, Halifax, Alliance & Leicester, Lloyds TSB and Smile, the internet bank owned by the Co-operative Bank.
The reductions, which have generally been around 0.25 per cent, come even though there has been no decrease in the Bank of England base interest rate since August. The best savings accounts on the high street now offer interest rates of around 4.5-4.8 per cent gross. Late last year, a small number comfortably topped 5 per cent.
Andrew Hagger, head of news and press at Moneyfacts, the research website, says: “There is no real reason for these cuts, although it looks like some providers might be cutting the rates on some accounts to fund rate increases on others.”
Nationwide attracted criticism earlier this month when, just two days after it announced that the interest rate on its FlexAccount would increase from 3 per cent to 4.25 per cent, it cut the rates on many of its savings accounts. It says the rate cut was due to margin pressure because it had been slower to react to last year’s base rate cut than several of its competitors.
Providers may also be feeling nervous given the recent fall in the yield on government bonds to record lows and the growing expectation of a base rate cut later this year.
Hagger says this time of year is also traditionally a season to be paying off debts rather than building savings, so there is generally less activity by the banks to attract new customers. “When the real drive to save kicks off in April, we are likely to see a wave of new products with better rates,” he says.
However if you can’t wait that long for a better deal there are a number of alternative saving products in the market that could offer more attractive returns than standard savings accounts.
Products such as guaranteed income bonds (Gibs) can provide good fixed returns but you generally have to invest for longer periods of time. With Gibs you can invest a minimum lump sum of £5,000 and opt for either a monthly income or capital growth. After the term has expired you are guaranteed your initial investment back if you have been taking income, or the initial investment plus interest if you have chosen the growth product.
According to independent financial adviser Baronworth Investment Services, the best rate for investors putting £10,000 into a two-year Gib is currently 4.12 per cent net of basic rate tax. This is equivalent to 5.49 per cent gross for a higher rate tax payer – significantly better than high street rates.
Colin Jackson at Baronworth says there is normally a surge in the popularity of Gibs when interest rates drop. He says these types of product also attract higher rate tax payers who will pay less tax on these bonds as the tax is calculated on the net rather than gross figure.
Investors willing to commit to a longer term investment could also try guaranteed equity bonds, which have a similar structure to Gibs but are linked to the stock market. Once the term on the bond has expired, you will receive your capital back plus growth determined by the performance of the index that the bond has followed.
Moneyfacts says the recent rate cuts only apply to certain products and many providers are still offering attractive rates on some of their savings accounts.
Although many providers have cut rates on their internet accounts, the best deals are still to be found by going online. Bradford & Bingley’s esaver is currently paying a gross annual rate of 4.85 per cent with a minimum opening balance of £1,000 and Nationwide’s reduced gross rate of 4.55 per cent for savings of £1-£9,999 is still competitive.
Savers who have not their £7,000 “maxi” individual savings account (Isa) entitlement in stocks and shares, should also look to fill their £3,000 annual allowance for a “mini” cash Isa, which pay up to 5 per cent interest tax free.
