Clare Francis: There’s been a lot going on in the savings market recently. Most of the activity has been taking place in the fixed rate bond arena where we have seen a number of providers launch new products with higher rates. The leading deals are now paying more than 4.0% which is pretty impressive given the Bank base rate is just 0.5%. However, that doesn’t mean a fixed rate bond is going to be the right option for everyone.
Kevin Mountford, who is head of banking at moneysupermarket.com, is here to explain what the difference between different types of savings accounts and what sort of saver they each suit.
Q1: So Kevin if we start with fixed rate bonds. Obviously their rates are looking pretty attractive at the moment but they are quite inflexible aren’t they so they won’t suit everybody. Can you just explain the main features of how they work?
Kevin Mountford: Yes, by the nature of them, the fact we’re talking cash bonds here they’re fixed, and generally fixed on two aspects. One is the length of the agreement – so how long you have to lock your money away for, and the other is fixed on rate.
Q2: Which means that you can’t make a withdrawal during the fixed term?
KM: You generally need to look at the terms and conditions but in the majority of cases you wouldn’t be able to make a withdrawal.
Q3: And the other thing is that a lot of them only allow one deposit to be made at the time of opening, so they are only therefore suitable for lump sum investments and not for if you want to invest regularly?
KM: Yes. Without getting too technical that’s because the way that they’re priced. So what they look at – the banks, the building societies – they tend to hedge a lump of money against what the market anticipates it will be over a fixed, given period. But once that money has gone then the tranche usually disappears. So what they do is they say ‘right, there’s the product: it’s available for a limited period of time, you open it, you put your lump sum in and that’s it, it’s closed’.
Q4: There is a different type of account that pays a higher rate of interest then say, easy access accounts but that is aimed at people who want to put money away on a regular basis. Can you explain how regular savers work?
KM: Yes, you’ve pretty much got two types of accounts. One is ‘term-based’ – so that’s where it’s fixed by nature – and the others are ‘transactional-based’ accounts, so they allow you to put money in to take money out.
Generally regular savers are ‘term’, in terms of the way that they are constructed, so usually they look at a fixed period, so often it’s over a 12-month contract between the bank and you the customer, and then they limit how much you can put in, but also there’s a minimum amount that you can put in and generally give you a fixed return on it.
These are absolutely great if you want to take a disciplined approach to savings, and you don’t have a lump sum, so the idea is that you will look at your budgeting process and say ‘right, I know that there’s x amount of pounds per month that I can afford to save, and I will put that into a regular saver account, so I’m disciplined for a 12-month period. Come the end of the 12-months, that moneys there and usually it’s attracted an interest rate that’s higher than you would get from elsewhere.
Q5: Because the best rates at the moment are sort of 6 or 7%?
KM: Yes, you get 6 and 7 per cent, so if you’re looking at that against bank base rate and the rest of the market then it’s attractive.
Q6: And what are the typical minimum and maximum amounts you can pay in a month?
KM: Usually £20-£25 as a minimum, generally £250 as the maximum. There are one or two exceptions that allow you to go up to £300 but this is another way that the banks can afford to offer such attractive rates because they know the maximum exposure they’re going to get is for instance 12 x £250 or £300.
Q7: As with fixed rate bonds the withdrawals tend not to be permitted during the 12 month term, so I guess if you need an account that you need to be able to dip in and out of, your best option is an easy access account which is the most popular type of savers account isn’t it?
KM: Yes, I mean just to finish on the regular savers, they do tend to be the most onerous in terms of the terms and conditions, so you need to look very, very closely at the terms of the account and not just the rate. But as you rightly say the most popular tend to be easy access – and I say tend to be, because that’s changed of late, and we’ll cover that – but easy access generally is about 60% of the market, and this is what we tend to call rainy day savings, so it just means that you can put your money somewhere safe - hopefully! – and then you get a rate of return on it and then you can dip into the money as and when you want.
And what a lot of people do is, whether it’s actually a conscious decision or whether it’s just something you do subconsciously is save for specific things. So you might say right, we want a deposit for a car, I want home improvements, I want to go on holiday, and you put that money away towards it. Unfortunately what research shows is that access to this is quite easy and generally means that you can take your money out when you want, free of any penalties, so we do have a tendency to dip into them more often than we ought to, and that’s why I say if you do need to be a bit more disciplined, and the terms and conditions work for you, then look at a regular saver.
Q8: There are some catches though that people need to be aware of when they are comparing easy access deals aren’t there?
KM: Yes, there are two main things. One of them is bonuses so for instance the leading product in easy access at the moment is ING. That carries a 2.2% bonus. The good thing about that is it’s fixed, so in a variable rate market rates can go up as they come down so it at least gives you a safety net there. But the one thing you’ve got to be mindful of is when the bonus drops off, it tends to default to a very poor paying rate, so what you need to make sure is you’re keeping a close watch on it.
But the other thing is some products will penalise you for making withdrawals. So they may say you’re allowed one a year, 3 a year or whatever, but don’t go into those accounts based on the rate, if the likelihood is you’re going to want to draw some money out.
Q9: Because another tactic that some use, is that they don’t pay interest in the month the withdrawal was made so your rate over the year can be a lot lower then the headline rate?
KM: Yes and unfortunately we don’t always know what our transaction behaviours going to look like, and there are often unforeseen circumstances that mean you dip into your savings but if there’s any danger in that then I would try and avoid those sorts of products.
Q10: So I guess the best thing for savers, it will obviously depend on how much money you have got and you can afford to save and what you have got already saved, but it’s to have a spread and to have money invested in different types of account?
KM: Yes, I mean there are two things really. That which helps you to achieve what you want to achieve in that cash savings environment. It should also allow you to flex different products to get the best return.
There’s two things we’ve not mentioned. One is notice accounts, and they are a lot less popular than they used to be. I remember years gone by where they would count for about 70-80% of the market, but that means that you put your money away and you have to give an amount of notice before you can withdraw it, and that can go from 7 days up to something like 90 days. Generally you’d expect to get a better return because the funds are sticking for a period of time, but that’s another option. And across most of these product types there are also Isas, and all that Isas are is a tax-free wrapper, and it can be around fixed product, regular saver products and so forth.
But if you take all of these products into the mix then ideally what you want is a combination of them, and if you can afford to block some money away then great, because that’s where the headline rates of 4% and above are available. You might say regular saver also allows me to lock some money away and I can’t touch it and then there’s a little bit of money there for me to just dip into as and when required.
Q11: The other thing to bear in mind is obviously protection and keeping your money safe and I think that is particularly at the forefront of people’s minds again at the moment with rumours that West Bromwich building society maybe in trouble. Can you just explain how you can do this?
KM: Yes there’s always going to be concern that there’s still some skeletons in the cupboard in terms of banks and building societies failing, but the one way you can go against it from a savers perspective is ensure that you keep within the compensation scheme limits, so that’s £50,000 per individual, per registered provider. So as we talked before Lloyds Banking Group has got Halifax, it’s got Lloyds and although they may maintain separate registrations, there are sub-brands as well, so they’ve got to look at the makeup of them, but that goes up to £100,000 if it’s a joint account.
So I think there’s a tendency - and using the West Brom as an example - that everybody panics and rushes and takes their money out. I mean that’s one thing for certain that really will bring a bank or a building society down, because as we’ve said they’re so dependant on savings on the balance sheet, so remain calm, no kneejerk reaction. But regardless of what mix of products you’ve got and what providers you’ve got, always keep within those compensation scheme limits. It’s already been proven to work, so we have to have some confidence in the system.
CF: Thank you Kevin.
KM: Thank you.