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

News
i100
News
Bobbi Kristina Brown, daughter of the late singer Whitney Houston, poses at the premiere of
people
News
people
News
The frequency with which we lie and our ability to get away with it both increase to young adulthood then decline with age, possibly because of changes that occur in the brain
scienceRoger Dobson knows the true story, from Pinocchio to Pollard
Voices
The male menopause: those affected can suffer hot flushes, night sweats, joint pain, low libido, depression and an increase in body fat, among other symptoms
voicesSo the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Life and Style
health
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: DBA Developer - SQL Server

    £30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

    Recruitment Genius: Customer Service Administrator

    £13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...

    Recruitment Genius: Dialler Administrator

    £22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...

    Ashdown Group: Contracts Manager - City of London

    £35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...

    Day In a Page

    Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

    US betrayal of old ally brings limited reward

    Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
    VIPs gather for opening of second Suez Canal - but doubts linger over security

    'A gift from Egypt to the rest of the world'

    VIPs gather for opening of second Suez Canal - but is it really needed?
    Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

    Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

    Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
    The male menopause and intimations of mortality

    Aches, pains and an inkling of mortality

    So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
    Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

    'How can I possibly be on the list with these writers I have idolised?'

    Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
    Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

    Bettany Hughes interview

    The historian on how Socrates would have solved Greece's problems
    Art of the state: Pyongyang propaganda posters to be exhibited in China

    Art of the state

    Pyongyang propaganda posters to be exhibited in China
    Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

    Vegetarian food gets a makeover

    Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
    The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

    The haunting of Shirley Jackson

    Was the gothic author's life really as bleak as her fiction?
    Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

    Bill Granger's seaside-inspired recipes

    These dishes are so easy to make, our chef is almost embarrassed to call them recipes
    Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

    Tourists are limp, leaderless and distinctly UnAustralian

    A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
    Blairites be warned, this could be the moment Labour turns into Syriza

    Andrew Grice: Inside Westminster

    Blairites be warned, this could be the moment Labour turns into Syriza
    HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

    The mystery of Britain's worst naval disaster is finally solved - 271 years later

    Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
    Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

    'I saw people so injured you couldn't tell if they were dead or alive'

    Nagasaki survivors on why Japan must not abandon its post-war pacifism
    Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

    The voter Obama tried hardest to keep onside

    Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen