Money Insider: Savers' misery as Government decides to
Friday 03 May 2013
Last August the Government's Funding for Lending scheme (FLS) was launched to bring down the cost of borrowing via mortgages and loans to help individuals and businesses. Nine months on, mortgage rates have fallen sharply as planned, but the side-effects have proved a nightmare for savers who have seen interest rates plummet.
To rub salt into the wound it has just been announced that the FLS is to be extended for a further 12 months.
Barely a day goes by without the launch of another record low mortgage deal. Only this week we saw HSBC offering a five-year fixed rate at 2.49 per cent for those with a 40 per cent deposit.
But while homeowners are making hay and remortgaging to low-cost home loans, savers have looked on helplessly as a huge chunk of their interest income has been washed away.
We are frequently reminded of the need to put money aside for our retirement, but if the incentive to save for the short term is eroded, it's going to have a knock-on effect on long-term savings too.
So far the Government has seemingly turned a blind eye to the plight of savers who have seen rates fall by up to 40 per cent since last summer.
It makes you wonder if this is what ministers had planned, hoping consumers would be so frustrated with the meagre returns on offer that they'd give up on saving and start spending instead – thus giving the economy the boost that the Coalition is desperate to see.
For those who rely on savings interest to boost their pension income it's a massive problem as they are facing higher energy, food and fuel costs on a much reduced income. For some savers this will leave them with no alternative but to use some of their capital just to make ends meet, but this strategy will only work for a limited period until their nest egg is exhausted.
Last August you could have earned 3.19 per cent on an instant access savings account; the best is now just 1.80 per cent. Similarly with fixed rate savings bonds, six months ago you would have got 3.50 per cent for one year and 4.50 per cent for five years; those rates have since slumped to just 2.15 per cent and 3.00 per cent respectively.
Even those looking to shelter their cash in tax-free savings aren't immune to the savings meltdown where there is only one Isa paying more than 3 per cent, whereas last August it was possible to achieve 4.15 per cent.
When you do the sums and work out what this means in real cash terms for savers it's easy to understand how some people are struggling to keep pace with the increasing cost of living.
A couple with a nest egg of £50,000 in a one-year fixed rate bond could have earned £146 per month before tax last August, but now the very best deal available will only bring in £90 per month, which works out at £672 less over the course of a year.
With experts predicting that inflation is more likely to increase rather than fall back within the 2 per cent target figure, the hardship for many people is likely to increase.
It's plain to see the financial misery that the Funding for Lending scheme is causing for savers, but the Government ploughs the same furrow regardless. George Osborne wants us to become a nation of savers – two words for you, George: fat chance!
Zopa's peer-to-peer lending passes £300m
The peer-to-peer market continues to gather momentum, with RateSetter and Zopa both reporting record business from savers disillusioned with low rates from banks and building societies.
This week Zopa reached a new milestone of £300m lent to UK consumers through its peer-to-peer lending platform. Giles Andrews, chief executive of Zopa, said: "We have already seen a 200 per cent uplift in savers signing up to Zopa in 2013, and with the financial sector experiencing a challenging time, this signals an exciting opportunity for us and future for the peer-to-peer industry."
Despite Zopa's default rate being extremely low (0.8 per cent on all money lent since launch), it has now launched a "Safeguard" feature to make up all the money owed from a borrower, including the interest, in the rare instance that they are unable to pay back their loan.
Much like the "Provision Fund" from RateSetter, although Safeguard isn't a cast-iron safety net like the Financial Services Protection Scheme, it does provide greater security and comfort to peer-to-peer customers. With rates of 5 per cent plus on offer for some products, it's no wonder more people are taking the plunge.
Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk
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