You win some, you lose some
Windfalls are a great short-term bonus, but interest rates are doing savers no favours
Sunday 14 April 1996
The likely windfall announcement follows last week's overwhelming vote by members of National & Provincial in favour of being bought out by the Abbey National in return for cash or shares worth at least pounds 500, to be paid out in late August or early September.
Both savers and borrowers stand to qualify for society handouts, but they are primarily a bonanza for savers. Building society savers typically outnumber borrowers six to one. Savers with balances as low as pounds 100 qualify for pounds 500-plus handouts, making such windfall-yielding accounts excellent "investments". And savers with bigger balances are typically entitled to bigger windfalls (up to pounds 4,250 in the case of N&P) while borrowers, even with mortgages of many tens of thousands of pounds, are more likely to be offered just a flat-rate payout of perhaps pounds 500.
So savers would seem to have little to complain about.
Behind all the windfall frenzy, however, savers are plagued with interest rates that are at historic lows and that continue to be pared away. In part this is a function of generally low interest rates - with the Chancellor cutting the already-low base rate by another 0.5 per cent this year. But, importantly, it is also the flipside of mortgage rates being at their lowest for a generation - savers are in effect paying for the fierce mortgage price war that is seeing discounts and other incentives worth as much as 6 per cent off a single year's borrowing costs. And many converting societies also seem to be taking advantage of savers' concern that they cannot touch their money without affecting their eligibility for windfalls.
Our table shows the interest rates savers are being paid on pounds 2,500 on instant access with big name societies that have either announced windfalls or are claiming to offer a better deal by remaining traditional societies.
The Halifax, for example, has now cut its interest by a full percentage point - from 3.7 to 2.7 per cent gross - since the start of the year, with the latest shaving coming just a week ago. For a higher-rate taxpayer this means after-tax interest of just 1.6 per cent on pounds 2,500 instant access in the society's popular Liquid Gold account. For basic rate taxpayers, the latest 0.3 per cent cut more than offsets the reduction in savings tax from 25 per cent to 20 per cent which came into force at the start of the tax year.
The cuts for savers have funded mortgage rate cuts by the would-be bank of 0.49 per cent (down to 7.25 per cent) over the same period.
The Halifax has, unusually, said it will tell savers in advance when they need to top up their accounts to maximise their entitlement to shares. Other converting societies have declined to say whether savers will reduce their entitlement by touching their savings.
Societies flying the mutual flag have maintained that savers (and borrowers) will be worse off with the would-be banks. And a move by the Alliance & Leicester to introduce charges from next month on accounts with balances of less than pounds 1,000 where savers make more than two withdrawals a month could be seen as a worrying development.
But even the traditional societies are cutting savings rates. Both Nationwide and Yorkshire building societies last week announced they would cut their mortgage rates by 0.25 per cent to 6.74 per cent from May 1 - a new low - in an attempt to establish a new building society mortgage rate norm below that of the would-be banks. The Nationwide said that while it would continue with its recently espoused policy of keeping its difference between saving and borrowing narrower than converting societies, it would still be matching the mortgage rate cut with 0.25 per cent for savers; and the Yorkshire said it expected to do the same. The main message from the table (and that of best savings rates on page 15) is that whether you are with a mutual society or a would-be bank, savings rates are still generally poor and talk therefore of a mutual bonus - for savers at least - is at best marginal.
Nevertheless, tax-free Tessa rates are still above 7 per cent, and fixed- rate Tessa deals are on their way back up, with Norwich & Peterborough building society's 7.65 per cent top of the pack for savers who are re- investing pounds 9,000 of maturing Tessa money. Fixed-rate deals are based more on interest rates on investments such as government gilts, rather than the base rate or mortgage rate, so it is quite possible for fixed-rates to be rising while other savings rates fall. Savers looking for income with a lump sum of pounds 20,000 they can tie up for seven years can get a fixed-rate as high as 7.14 per cent net of basic rate tax (equivalent to 8.93 per cent pa gross) from a bond on offer from Financial Assurance, according to financial adviser Baronworth Investment Services (0181-518 1218).
Society Windfall When due Interest on pounds 2,500 (average) instant access (% gross)*
Halifax pounds 900 shares summer 1997 2.70
Woolwich pounds 800 shares autumn 1997 2.35
Alliance & pounds 800 shares spring 1997 2.75 Leicester
National & pounds 500-plus Sep 1996 2.80 Provincial shares/cash
Northern Rock pounds 1,000 shares autumn 1997 0.65
Bristol & West pounds 600 cash? 1997? 1.65
Nationwide None n/a 3.10 announced
Bradford & None n/a 2.10 (1) Bingley announced
* Source of interest rates: Moneyfacts
(1) 0.75% bonus if three or fewer withdrawals pa
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