Personal Finance: Mind the trap when rates fall

Borrowers welcome a cut in interest rates but savers should hunt for guarantees, says Clifford German

FALLING interest rates are only good news for borrowers. These days, rate cuts make savers doubly nervous, not just because their investment income is shrinking. How can they be sure they are getting a fair deal? The competition to offer "best buys" is intense: this week's "market leader" can quickly be overtaken by competitors and few people have the time or opportunities to keep switching their money from one account to another.

Banks and building societies have also been known to take advantage of investors by selectively reducing the interest on accounts that they are no longer actively promoting, leaving unwary savers even more out- of-pocket.

Banks and building societies both subscribe to the Banking Code, which commits them to advertise changing interest rates in the media, and in the branches, but not everyone reads the papers and not everyone regularly does their business in the branch these days.

A new version of the code comes into operation at the end of March next year, but it will still not be compulsory for them to notify savers individually and, to be fair to them, the postal system would probably collapse under the sheer weight of mail if every account holder had to be notified by post every time rates changed.

In the meantime, however, a number of banks and building societies do now offer "guaranteed" rates of interest. Rates will still fluctuate, and they are not guaranteed to be the best rates currently available, but they will remain linked to a published benchmark rate, usually base rate, giving savers some sort of "guarantee" that they are not being cheated.

"Guarantees" come in two different types, those which track a well-known yardstick such as base rate or a money market rate like LIBOR, and those which offer an average of either the best or the biggest high street operators and recalculate their rates each month. Neither type of account guarantees the best rate, and those linked to rival rates by definition will be a touch below the best available at any one time. But at least there are no traps for the unwary or those too busy to keep close tabs on changing rates.

Close Brothers introduced its pioneering Crystal Account in 1995, promising to pay within a half per cent of base rate at a time when rates were actually rising. Skipton building society's protection bond offers a fixed rate until March 2000 when it switches to base rate. Notting- ham Imperial building society guarantees to pay half per cent above base rate until the millennium, although this product may not be on offer much longer. Egg, the Prudential's new account, promises to pay 8 per cent until the end of this year, then at least 0.5 per cent above base rate next year, followed by base rate until January 2001.

Virgin Direct's deposit account pays 1 per cent under base rate on amounts as low as pounds 1 and the rate will stay at 6.25 per cent for the time being. Other deposit accounts offer rates linked to the average of leading competitors. Saga guarantees its savers that they will receive the average of 10 leading high street savings bodies. Its current rate on pounds 5,000 is 6.55 per cent, which could go down to just over 6 per cent next month. FirstActive (0800 558844) is currently paying 7.16 per cent on pounds 1,000. Norwich Union's index tracker account is currently only available to customers with maturing Norwich Union policies, but is expected to go on offer to the wider public next month.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
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.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'