There has been a lot of talk about the big winners when interest rates fall - i.e. borrowers. But what about people who rely on a reasonable amount of interest on their deposit accounts - the savers? Falling interest rates are a nightmare for savers, and with the Bank of England (BOE) dropping rates further, what options do you have if you are a saver?
There has been a lot of talk about the big winners when interest rates fall - i.e. borrowers. But what about people who rely on a reasonable amount of interest on their deposit accounts - the savers?
Falling interest rates are a nightmare for savers, and with the Bank of England (BOE) dropping rates further, what options do you have if you are a saver?
National Savings have often been chosen by savers looking for a safe place for their money with a reasonable rate of interest. But even Premium Bonds have become a victim of the rate cull.
As the banking crisis dragged on, many flooded National Savings & Investments with new deposits. This was perhaps understandable, because of the 100% guarantee offered by the government.
But, following the rate cut, the Premium Bond prize fund rate was lowered to a paltry 1.8% per annum. This means that the odds of winning a prize were slashed from 24,000 to 1 to a stingy 36,000 to 1.
Index-linked savings certificates have also been reduced markedly, offering now only 1% above inflation over 3 or 5 years. Although with all things taken into account, perhaps this will prove attractive.
Furthermore, these rates are due to be reviewed again as the base rate was reduced further to 2% this week.
We wish we could come up with some easy answers. However, there are none. The best course of action for savers is to review where they are investing on a regular basis.
Before the latest rate cut to take BOE rates to 2%, there were several providers offering a rate of 5.0% plus. Since these providers will be reacting to the further BOE rate reduction, you will need to check and recheck all the different offerings in the weeks to come.
For example, one provider that should be included in any research is the Anglo Irish Bank Easy Access Deposit Issue 2. The account (for now) pays 5.25%, but it is important to take into account that all your deposits are guaranteed by the Irish government until 28th September 2010.
Also, they will send any withdrawals you make to you by CHAPS, meaning it is guaranteed to hit your nominated account on the same day (providing the request is made before 2pm). This is good for those who may need quick access to their money, and is both quicker and more reliable than the usual options. It is also provided completely free of charge by Anglo Irish, which sounds good to us.
Also, one of the major problems that savers face is when an attractive rate is offered but very quickly the provider drops this rate and you are back at square one. If this concerns you perhaps it's time to turn away from the best buy tables and focus on the most consistent accounts instead.
According to Moneyfacts, the most consistent internet account over 36 months is Sainsbury's Internet Saver. At the moment it pays 3.5% AER, which is around two-thirds the interest rate paid by some accounts, but it has proven consistent over the longer term and has provided the best returns on £1,000 over three years.
Please note - regular readers will remember in previous articles we have also discussed the Depositors Compensation Scheme, now set at £50,000 per investor per Institution (not brand). If you have larger amounts than this to put on deposit, it is worth 'spreading your eggs'.
The Financial Tips Bottom Line
At the moment the most important thing is to keep your eye on the ball and be prepared to be proactive and ready to switch should your savings rate suddenly lag behind.
Action Point
The difference in rates between accounts is likely to be large. Don't be caught out. Use sites such as Moneyfacts to check out the various provider offerings. Act now to protect the return on your savings!
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