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Cuts to interest rates hit savers


Hard-hit savers face more income falls as banks and building societies make further cuts to their interest rates.

The average return on a one-year fixed-rate account has fallen from 2.77% to 2.57% in the past two months, while the typical two-year fix has dropped from 3.29% to 3.01%, according to website Moneyfacts.

A string of providers have made reductions to some of their savings rates over the past weeks or so, including Halifax, Santander and the Principality Building Society, the consumer help website said.

Meanwhile, the most competitive rate on a five-year fixed-rate bond has fallen to 3.98%, compared with 6.56% five years ago, with many market-leading deals being withdrawn very quickly after launch.

Analysts suggested that returns on savings pots could edge lower still as banks become less reliant on attracting savers' deposits a result of the Bank of England and Treasury's recently-launched funding for lending scheme.

The £80 billion scheme was launched at the start of August and gives banks access to cheap funding to unclog the flow of credit to households and businesses.

Kevin Mountford, head of banking at comparison website Moneysupermarket said: "The main focus of many banks has been attracting retail deposits through competitive higher rates because they have been unable to access wholesale funding given the tough financial conditions and the eurozone crisis.

"Cheap loans from the Bank of England through funding for lending should give them a way to reduce their reliance on deposits. However, this could have a negative effect on savers."

Savers have already been struggling to find any accounts to give them real returns on their cash, amid high inflation and more than three years of the Bank of England base rate being held at a historic 0.5% low.

They have lost around £85 billion since 2007 as a result of interest rate cuts, according to research from Nationwide, which used industry figures from the Bank of England and Moneyfacts to compile its research.

Nationwide said this is the equivalent to almost £3,270 per household in the UK, with pensioners faced with high living costs and would-be first-time buyers struggling to save a hefty deposit having been particularly badly hit.

It calculated that a typical pensioner without a sizeable personal pension to fall back on could be seeing almost £500 a year wiped off their savings as a result of interest rate falls, compared with the returns they could have made in 2007.

The typical "non-affluent" pensioner, who tends to rely on their income from the state pension and savings, has a savings balance of just under £16,400, Nationwide found.

This would have given them interest of £669 a year at the start of the credit crisis in August 2007, based on a typical easy access savings account which paid a rate of 4.08%. This rate has since dropped to around 1%, providing an income of £179 a year, equating to £490 less.

Nationwide said that if the Bank of England base rate edges lower from its 0.5% historic low to 0.25%, as some have suggested it might, these same pensioners could see returns fall to around £138 a year, equating to an annual loss of £531 compared with 2007.

The building society said that those trying to save a deposit for their first home have also been dealt a blow by low returns.

With an average of £2,979 saved up, these savers would have seen their annual interest tumble by £90, from £122 in August 2007 to just £32 typically, based on the same average savings rates.

If the base rate drops to 0.25%, these struggling first-time buyers will be earning around £25 a year in interest, almost £100 less than in 2007.