Fierce competition for savers’ cash is set to continue as rising inflation rules out further base rate cuts for the foreseeable future.
But experts warn that even with indications that the Bank of England will freeze the base rate at the current 5 per cent, savers still need to watch out for reductions on their accounts and be prepared to move their money to get the best return.
“In a period of stability for the base rate, banks and building societies will have less excuse to downgrade accounts,” says Kevin Mountford, head of savings at Moneysupermarket.com, the comparison service.
The battle for retail deposits sparked by the credit squeeze is likely to remain as intense as ever, he adds.
But the question is “how much account manipulation we also get from providers”.
Some savings deals continue to offer record premiums to the base rate, with fixed-rate bonds yielding up to 7 per cent and some instant access accounts paying as much as 6.5 per cent.
The level of these top returns has also remained virtually impervious to base rate cuts totalling 0.75 of a percentage point since December. The catch is that in many cases savers have had to switch accounts to take advantage.
Many providers have launched new deals offering top returns but at the same time have cut interest levels on previous deals.
“Best-buys can become uncompetitive quickly when they are withdrawn [from new investment],” says Rachel Thrussell, head of savings at Moneyfacts, the rate monitor.
She adds that even where accounts stay at seemingly competitive levels, savers need to watch out for introductory bonuses falling off their rate, leaving them with a reduced return.
The obvious way to protect against reductions is to lock into a fixed rate. While this generally means giving up access to your money, the best-paying bonds only tie in savers for up to a year. Icesave offers a rate of 7.01 per cent on a one-year bond, while Birmingham Midshires offers 6.83 per cent on a six-month bond.
Mountford says that savers wanting to balance high returns with more flexibility could consider splitting their funds between fixed and variable-rate products.
There are also deals offering a combination of reliable returns and access. Leeds Building Society this week launched an “unlimited access” bond paying a fixed 6.25 per cent until January, which allows penalty-free withdrawals.
Alternatively, Saga’s Online Top 5 Tracker pays a variable rate that guarantees to be within 0.25 per cent of the average of the best-paying five internet accounts. The rate, currently 6.25 per cent, will be reviewed monthly.
A range of accounts also carry guarantees to exceed the base rate for a period. Icesave’s Easy Access Deposit account promises to pay at least base rate plus 0.35 per cent for the next three years, according to Moneyfacts. Its current rate is 6.05 per cent.
Mountford warns that while such guarantees offer savers a “comfort zone”, they do not provide much value. Thrussell adds: “Base rate guarantees don’t guarantee a decent rate.”
Moneyfacts also tracks the most consistent accounts (see below or at www.moneyfacts.co.uk/consistent) that are still open to new savers, based on interest paid over the previous three years.
Moneyfacts says it has seen increasing online traffic from savers “fed up” with accounts losing competitiveness and who “don’t want to keep moving their money”.
The results show that building societies “tended to play fairer” than banks, Thrussell says.
She adds that new savings providers such as the Icelandic banks Icesave and Kaupthing Edge have also maintained high returns. Some experts say Anglo Irish Bank has also established a reputation for being a reliably good payer.
Under the Banking Code, savers are entitled to be notified individually when accounts are downgraded relative to base rate.
Banks and building societies are required to write to savers when the rate on their account is cut by more than than 0.25 per cent without any movement in base rate – or more than 0.5 per cent when the base rate is cut by a quarter point.
Similarly, savers are entitled to be notified if their rate comes down by a total
of 0.5 per cent or more relative to the base rate over a year.
“Providers can cut rates as much as they want so long as they notify savers,” says Adrian Lloyd, compliance director at the Banking Code Standards Board. “The onus is on customers to act”.