Why savers need to be vigilant

We saw the Bank of England reduce interest rates by half a point in October and another cut is expected on Thursday. Many economists are warning that Bank rate will have to fall significantly if the UK is to avoid a prolonged recession.


This is obviously bad news for savers as a lower Bank rate means lower savings rates and it makes it even more important to ensure you are getting the highest possible return on your money.

In recent months banks and building societies have been courting savers as they’ve sought to use retail deposits to offset funding shortages caused by the credit crunch. This has resulted in some fantastic savings deals. But with interest rates on their way down life is set to become a lot harder for savers as they seek to stop the value of their money from being eroded by inflation.

On the plus side, institutions are still keen to attract money from the likes of you and I, which means that the leading rates will continue to be significantly higher than Bank rate. However, interest rate cuts also provide the perfect opportunity for institutions to tweak their margins. It is quite common for them to have one or two flagship accounts which they use to attract new customers and the rates on these are likely to remain competitive. The losers will be the customers who have had their money in the same account for years as the rates on these deals are far less attractive – providers rely on these people to effectively subsidise those with the higher paying deals.

Now is not the time for savers to rest on their laurels - be prepared for some highly tactical rate changes over the coming months, and be ready to move your money if necessary.

What’s happened to savings rates?
The full fallout from October’s rate reduction still hasn’t been seen with many of the largest providers yet to show their cards. It’s not uncommon for banks or building societies to leave it until the twelfth hour to disclose their new rates – most rate changes don’t take effect until the beginning of the month after we’ve seen a change in Bank rate and with November 1 falling on a Saturday, they were granted an extra couple of days before they needed to announce new rates.

That said we have seen some rates change and a number of providers have reduced rates on some accounts by more than the 0.5 point cut in Bank rate.

The recent turmoil in the banking sector has seen savers seek the ultimate security, but the ‘safest’ providers are among those that have passed on the biggest rate cuts. Here in the UK, two providers offer 100% protection on all savings balances - National Savings & Investments and Northern Rock. NS&I has cut its rates by an average of 0.58 percentage points while Northern Rock, has reduced rates by 0.5 points but perhaps more significantly it has withdrawn its products from the market to prevent new customers from depositing money.

Other providers to have reduced savings rates by more than the half point cut in Bank rate include Firstsave Bank of Nigeria which has slashed the rate on its easy access account by 1.25 percentage points, while Cheltenham & Gloucester has cut rates by an average of 0.56 points, Derbyshire building society has announced cuts averaging 0.52 points and Barclays’ savings rates will be reduced by an average of 0.51 points on November 3. Birmingham Midshires has cut the rate on its e-Saver Account (Issue 2) from 6.52% to 5.99%

What should savers do?
If the rate on your savings account falls by more than the reduction in Bank rate, or if you are in an account paying less than Bank rate (currently 4.5%) then you should definitely move your money elsewhere. Why let providers get away with treating loyal customers in this way when there are still some highly competitive deals to be had?

In the current environment, with many savers nervous about the safety of the banks, the other key message is make sure you don’t have more than £50,000 invested with a single institution. We can’t rule out further turmoil in the banking sector but there is little point in trying to second guess which, if any, institution may fall victim to the financial crisis – and there is no need to. Under the terms of the Financial Services Compensation Scheme (FSCS), the first £50,000 held with an institution that is registered with the Financial Services Authority, is totally guaranteed. If you have more money than this in savings, look to spread it around between different providers.

For more information on the FSCS and how it works, read our articles Who owns who?, How to keep your savings safe and How safe is your bank?. 

What are the best deals?
With further interest rate cuts on the horizon, it could be a good time to fix your savings rate. Fixed rate bonds pay a set amount of interest for a certain period of time. However, you cannot normally access your money during that time and most products only accept a single lump sum investment when the account is open, so fixed rate bonds don’t suit everyone. If you have money you can afford to lock away, there’s no time to waste as we’ve seen a number of providers reduce fixed rates in recent weeks. It wasn’t long ago that there were a host of 7%-plus deals available to those wanting to fix their savings rates. Now there are only four providers paying rates of 7% or more.

ICICI Bank is offering the highest rate. Its one-year Hisave Fixed Rate account is paying 7.10%, but this has just been reduced from 7.20% and with so many other fixed rates being reduced, this rate may not be around for long.

If you are looking for a more flexible account that allows you to dip in and out of your savings, the best rates are expected to be paying around 6% once all providers have responded to the recent interest rate cut. That’s still pretty impressive given that Bank rate is 4.5%.

However, at the time of writing West Bromwich had yet to announce changes to its savings accounts, so expect these rates to fall in the coming days. A more attractive option, could be the Egg Savings Account. It allows unlimited withdrawals with a rate of 6.55% - and Egg is one of only two providers thus far to have increased its rate of interest since the previous MPC announcement. The account however, does include a 1.80 percentage point bonus for the first year – at which point the rate drops to 4.75%.

Have your say: How do you rate your provider? Give feedback on your experience with your savings provider and help others decide which provider to choose.

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

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