What now for savers?

With interest rates getting ever closer to zero, the plight of savers worsens. The decision by the Bank of England to cut interest rates again was the last thing savers wanted – or needed.

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Bank rate has now fallen from 5% to 1% since last October and we may only be months away from 0% interest rates as the Government and Bank of England fight desperately to pull us out of recession.

While there are clearly economic factors influencing the Bank of England’s decisions, as far as the average person on the street is concerned there is a growing feeling that interest rate cuts aren’t having much positive impact.

One of the hopes is that lower interest rates will encourage individuals to spend more as, in theory, they should benefit from cheaper mortgages giving them more money to spare enabling them to spend and in turn, boost the economy.

However, in practice this isn’t happening. According to moneysupermarket’s latest poll, only 23% of respondents said they’ll be better off following this month’s rate cut. The vast majority – 70% - said they’ll be worse off (7% said they didn’t know).

Many of these people are savers and they’ve seen the returns on some accounts fall by around 70% over the past 12 months. We look at what savers should do to survive these incredible and highly unusual times.

Don’t put all your eggs in one basket

The only single piece of advice that applies to all savers at the moment is not to give up and assume that just because interest rates are low, it doesn’t matter where your money is. It does. There is a big difference between the highest paying accounts and the average and if you do anything, it should be to ensure you are getting the best return possible.

Apart from that, it all depends on how much money you have and whether you’ll need to access it or not.

The best rates are available on fixed rate deals – ICICI Bank’s one year HiSave Fixed Rate Account is paying the leading rate at 4.3% - but it’s not advisable to put all your money into this type of account as you cannot usually access it during the fixed rate term.

A cash Isa is a must if you are a taxpayer because interest is paid tax-free. Those in the higher-rate band therefore effectively get a 40% boost to their return, while basic-rate taxpayers earn 20% more interest than they would with a standard savings account. Manchester Building Society’s Premier Instant Isa pays the leading rate at 3.5%

However, you can only invest £3,600 each tax year in a cash Isa so again, for many savers this won’t be a suitable home for all their savings. Also, you lose the tax-free status on any money taken out of an Isa so although many accounts permit penalty free withdrawals, you should try not to touch the money you have in an Isa if at all possible.

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Everyone should have a rainy day fund that they can dip in and out of for unexpected emergencies. And particularly in the current climate, with many people unsure about their job security, it is worth having a savings buffer – money which is accessible – just in case their financial situation changes.

The highest paying easy-access accounts have rates around 3.5%. These include Citibank’s Flexible Saver Issue 4 at 3.56%, and ING Direct and Egg, both of which are paying 3.5%. However, bear in mind that these rates are likely to drop in the coming weeks following the latest interest rate cut.

Therefore, as I explain in our latest video blog on this month’s interest rate decision, it is worth spreading your savings between different types of accounts. And if you have a large amount in cash savings make sure you don’t have more than £50,000 invested with a single institution. Under the terms of the Financial Services Compensation Scheme, only the first £50,000 (£100,000 for joint accounts) is fully guaranteed in the event of that institution going bust.

For more help and information on the different types of savings account and how to ensure all your money is fully protected, read our articles How to choose a savings account and Who owns who?.

To compare more savings rates, visit our savings channel.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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