High interest rates for savers who switch

Listen to this article

00:00
00:00

Savers who have regularly switched banks and building societies in pursuit of the best interest rates could have earned total returns of 70 per cent over the past decade, substantially outperforming most share investments and underlining the potential of cash to deliver rewards at low risk.

Research for the FT by Defaqto, the industry analyst, found that cash investors who transferred their money annually between the best-available one-year fixed savings bonds could have boosted returns by nearly 30 percentage points compared with sticking to a standard account between 2000 and end-2009.

In 2009, for example, this approach to cash management could have yielded gross returns of 5 per cent, in contrast to rates of about 1 per cent offered by the average instant access account.

David Black, Defaqto banking consultant, said: “The key for savers is to be proactive: those who stay in the same account for years are unlikely to earn a good rate; those who regularly review the rates they are earning and switch providers can vastly improve returns.”

Savers’ returns could have averaged more than 5 per cent a year, before tax, over the decade, while cash individual savings accounts (Isas) could have produced tax-free yields at almost the same level.

This compares with a total return of 16 per cent from the FTSE All-Share index, including gross dividends, between 2000 and end-2009, and 69 per cent from a benchmark gilt index, according to the recently published Barclays Capital Equity Gilt Study of long-run investment performance.

Barclays calculates the return from building society savings, based on rates from Nationwide’s InvestDirect postal account, at 41 per cent, before tax.

The past decade was unusually poor for equity investment, with shares suffering from the bursting of the dotcom bubble and then the credit crisis, while gilts had a strong run on the back of lower inflation.

However, financial advisers said that many share investors will have been lucky to have even matched the index return, given the cost and inconsistency of actively managed funds.

By contrast, switching cash to take advantage of higher interest rates could have ensured improved building society returns.

Defaqto’s analysis was based on selecting the best one-year fixed-rate savings bond at the start of each year, but savers with a more flexible approach may have been able to generate even higher returns.

Investment advisers point out that shares generally outperform over the long term and have even beaten cash over most two-year periods, according to Barclays’ analysis of more than 100 years of data.

In fact, shares have returned an average of 4.2 percentage points a year more than cash since 1900, according to research by Credit Suisse.

However, Adrian Coles, director-general of the Building Societies Association, said that the question for private investors was whether shares offered an adequate premium, “given that they could also lose a lot of money”.

“The case for cash has been underplayed,” said Jason Butler of Bloomsbury Financial Planning.

Many wealthy investors don’t need to take much risk to meet their goals, he suggested.

He predicts a growth in banking services that will find the best rates and spread risks for individuals.

But Elroy Dimson of London Business School, joint author of the Credit Suisse research, warned against investors holding too much cash.

“If you can make 3 to 4 per cent more a year from equities over 15 years then you’re a lot richer,” he said.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.