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
Arts and Entertainment
Chris Martin of Coldplay performs live for fans at Enmore Theatre on June 19, 2014 in Sydney, Australia. (Photo by Mark Metcalfe/Getty Images)
music
Sport
Dave Mackay lifts the FA Cup in 1967 having skippered Spurs to victory
football
Life and Style
Marie had fake ID, in the name of Johanna Koch, after she evaded capture by the Nazis in wartime Berlin
historyOne woman's secret life as a Jew in wartime Berlin
News
Jihadi John
newsMonikers like 'Jihadi John' make the grim sound glamorous
Arts and Entertainment
As depicted in Disney's Robin Hood, King John was cowardly, cruel, avaricious and incompetent
film
Life and Style
Travis Kalanick, the co-founder of Uber, is now worth $5.3bn
tech
ebooks
ebooksA special investigation by Andy McSmith
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: Junior Application Support Analyst - Fluent German Speaker

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

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn