Agony piled on savers but lenders are in the money

Those who salt their money away have been hammered again as rates are chopped back. Chiara Cavaglieri and Julian Knight report

For every good news story giving borrowers something to smile about, savers are hurting. Mortgages are getting cheaper and lenders are battling to offer lower fees and longer interest-free periods to credit card customers, but savers are getting the raw end of the deal. Rates have taken a dramatic nosedive and with inflation taking its bite, many savers are actually losing money.

The consumer prices index rate saw a surprise drop to 2.4 per cent in May, yet the paucity of rates on offer means that there are no standard savings accounts that beat or match inflation today.

This rate wasteland is even more stark when you consider that the CPI measure is believed to often underestimate the true extent of the rise in the cost of living.

Cash ISAs are a better bet because you don't have to worry about tax and as a result several do offer inflation-proof returns, but they all carry strings.

For example, United Trust Bank and Julian Hodge Bank offer bonds paying 2.45 per cent and 2.40 per cent respectively but you lose access to your money for five years.

"Cash ISAs can provide a helpful boost, not only because the rates are better, but also because the interest is tax free," says Anna Bowes of Savings Champion. "However, you have to either have a larger balance to transfer, be an existing customer/current account holder with that provider, or be prepared to lock your money up."

Savers were dealt another blow when the Government-backed bank National Savings & Investments announced it will slash rates on three savings products, coming into effect on 12 September 2013.

The Direct Isa will be reduced from 2.25 per cent to 1.75 per cent, the Direct Saver from 1.50 per cent to 1.10 per cent and the NS&I Income Bond will lose 0.5 per cent, reduced to just 1.25 per cent.

"This latest reduction by NS&I is disappointing news for savers, who have an uphill struggle to get the best rates. With the NS&I changes due in September savers will have to decide whether to stay or switch from a trusted brand," says Charlotte Nelson of Moneyfacts.co.uk.

One bank has bucked the trend by actually increasing rates with ICICI Bank launching a new range of HiSave fixed-rate accounts.

You need at least £1,000 to open any of the three accounts and you won't have access to your money, but you are rewarded with a market-leading rate of 2.30 per cent on a two-year bond, 2.55 per cent on a three-year bond and 2.75 per cent on a five-year bond. ICICI is based in India but its UK subsidiary is fully covered by the Financial Services Compensation Scheme so your deposits are protected (up to a maximum of £85,000).

Aside from this lonely nugget of positive news, Virgin and NS&I are the latest in a long line of banks and building societies reducing returns and shrinking their savings ranges.

Since the beginning of the year Moneyfacts.co.uk says there have been 311 reductions made to savings products and this week, Santander condensed its range of nearly 100 accounts – many of which the bank took on when it acquired Alliance & Leicester, Abbey and Bradford & Bingley – to just five default accounts.

The bank has said that the majority of customers will see a rate rise when they switch and the most fortunate will see rises of 1.90 per cent, but this still leaves hundreds of thousands of Santander customers facing cuts.

Savers with their money in the old Alliance & Leicester eSaver (issue 5), for example, will lose a mammoth 1.86 per cent when their rate falls from 2.36 per cent to 0.5 per cent.

It is useful for providers to keep the number of different savings accounts on the books to a minimum so that customers can more easily understand exactly which interest rate applies to their account, but it is a worry if other banks use consolidation as an opportunity to decrease rates.

Falling rates are a huge blow to savers, particularly with NS&I's products, which have been top of the best buys after savings rates across the market plummeted to all-time lows due to the knock-on effect of the Government's Funding for Lending Scheme, introduced to help kick start the mortgage market. "Banks now no longer need to rely on savings to fund their mortgages. Because of this, providers who are not normally best buy rates have slowly risen to the top of the charts.

"This has resulted in products being withdrawn or vastly reduced due to oversubscription," says Ms Nelson.

With the FLS recently being extended, savings rates are likely to stay low for a long time so savers will continue to face an uphill struggle to get a decent return on their money.

Rate changes and bonus periods make life more difficult but Savings champion.co.uk offers a free Rate Tracker tool to help monitor accounts.

It's more important than ever for savers to review existing accounts to see if they could be getting a better rate elsewhere and when the best buys come to market, they need to move quickly before they're pulled. Above all, it could be time to consider other ways to get a decent return.

"Savers can improve their returns by shopping around for the best rates and ensuring they switch accounts when at the end of a fixed term rate," says Danny Cox of Hargreaves Lansdown.

"Interest rates are going to remain low for at least a couple of years and therefore savers have the choice of the spending power of their cash falling or taking some risk in the markets with the aim of improving returns."

Ways to put the cash to work

Premium bonds

NS&I's average interest rate is 1.50 per cent, but there's also a monthly £1m prize.

Peer-to-peer lending

Lend your money directly to individuals and take banks out of the equation, splitting each loan across many borrowers to spread risk.

Stock market

If you are prepared to risk capital, look into equity income funds or invest in a stocks and shares ISA.

Offset mortgage

Lenders such as First Direct, Accord, Woolwich and Yorkshire BS facilitate a home loan interest reduction, while retaining access to cash.

Buy-to-let

With a buoyant rental market, many people are becoming landlords. Risks include falling prices, difficult tenants and maintenance costs.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

    The 161-page dossier that exposes Fifa's dark heart

    How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
    Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

    Exclusive interview with Tripoli PM Khalifa al-Ghweil

    'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
    Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

    Raymond Chandler's Los Angeles

    How the author foretold the Californian water crisis
    Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

    Art attack

    Chinese artist who posted funny image of President Xi Jinping facing five years in prison
    Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

    Cher is the new face of Marc Jacobs

    Alexander Fury explains why designers are turning to august stars to front their lines
    Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

    'I'm climbing Ben Nevis for my daughter'

    Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
    10 best wedding gift ideas

    It's that time of year again... 10 best wedding gift ideas

    Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
    Paul Scholes column: With the Premier League over for another year, here are my end of season awards

    Paul Scholes column

    With the Premier League over for another year, here are my end of season awards
    Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

    Liverpool have seen too much tragedy to forget Heysel

    Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
    Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

    Khan’s audition for Mayweather may turn into a no-win situation

    The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor