A raw deal for savers – why do rates keep falling?

by , Money Researcher Money 22 January 2013
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Interest rates on savings continue to plummet despite the base rate staying still. Throw in stubbornly high inflation and savers are left with a pretty raw deal. Can anything be done to tackle the savings rates freefall?

Piggy bank with plasters

If you’re anything like me, you probably find it a struggle to put any money aside full-stop. But when the rewards for dutifully squirreling away your hard-earned cash are so measly, it’s easy to think, ‘why bother?’

So what’s behind the drop in savings rates? Many have pointed a finger at the Funding for Lending Scheme (FLS), which was launched in August 2012. The aim of the scheme was to provide cheap finance to banks, to encourage them to approve more mortgages.

While mortgage customers benefit from the scheme, competition in the savings market has dwindled. This may be because providers no longer need to rely as heavily on savings accounts to fund the mortgages they lend.

Interest rates nosedive

Back in July, before the launch of the FLS, the best instant access account available paid 3.20% interest, meaning that a lump sum of £10,000 would earn £320 in interest over a year. But today, as the best rate has plummeted to 2.10%, the return would be £110 less.

The cash Isa market tells an equally sorry story: last week the best cash Isa rate dropped below 3% for the first time since 1999. Rewind just six months, and you could have earned over 4% by locking your money away in a fixed-term account.

Worse still, the positive correlation between longer-term savings accounts and interest rates seems to be disappearing. Currently – no fixed-term cash Isas offer a higher rate than the best instant-access savings account.

With rates at rock bottom, we think clear communication from providers is crucial. Savers should be able to easily track their savings rate to make sure it remains competitive, and see how their money is growing.

Can we save our savings?

When we ran our Great British Savings Scandal campaign in 2010, we found that poor communication from providers was often to blame for customers being stuck with miserly interest rates. We were pleased to find that the top eight savings providers among Which? members now all display interest rates on paper statements. But, disappointingly, NatWest, First Direct and Santander still don’t show them on online statements.

While many providers keep customers informed about the interest rate on their account, some 62% of Which? members said their provider had never notified them that a better savings account was available. This makes it all the more important to be proactive in shopping around to find out how much more you could be earning.

Have you managed to dodge poor interest rates by clever switching? Or have you considered ditching traditional savings options in favour of alternatives such as peer-to-peer lending to find a better return?

12 comments

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banjo

“Savers should be able to easily track their savings rate to make sure it remains competitive”

Competitive with what? Even if you find an account with a rate which doesn’t make you vomit it will still probably have a 12 month bonus after which you will want to move it again. Some Building Societies which used to be brilliant (particularly the Skipton) are now amongst the shoddiest when it comes to regularly reducing their rates. I’ve been with them for 30 years and haven’t received any helpful advice or mailshots for many years.

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LLG

Banjo stop moaning and help yourself. Institutions rely on the inertia of customers like you. In fact, YOU encourage them. If we were all more financially aware we would all be better off.

It is not difficult for savers to seek out the best savings account suited for their needs, to make a diary note of the bonus expiry date and move the money on.

At the moment I quite enjoy “round tripping” £1,000 between two accounts with the Halifax to earn £10 a month. The cash leaves a savings account [ with x ] on day one, I move it to Halifax account two on the same day, along with the £5 “interest” it earnt. The £1,005, plus the further £5 “interest” from account two goes back to the original savings account with x same day.

Stop sleeping financially, open your eyes and ears and play the game.

Please don’t bang on about not being able to save, you can. You need to learn the difference between NEED and WANT. For example, I want a Costa coffee but don’t need one.

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banjo

Isn’t this conversation supposed to be about providers giving their savers information? Let me check! Yes it is. So me just saying “I’m pulling my saving from the Skipton” would not be a very sensible or relevant post, now would it?

As it happens I have savings with 17 providers at the moment and move money around regularly. When I move money from a provider I will always leave a few pounds in an account with them so that if I decide to move money back there in the future I don’t have to go though all the crap of supplying passports, driving licences, gas bills, letters from the Pope or whatever dross they need to prove who I am. I can just say “I have an account” and it saves a huge amount of time.

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wavechange

LLG

You have got it all worked out, so maybe you should go and have your coffee, whether you want it or need it.

Jenny has posted an interesting Conversation and Banjo has made useful comments. As someone who can’t be bothered to play your games I am interested in anything that can help the majority of people, who don’t keep their money on the move.

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LLG

Banjo, sorry, I apologise. I should not write anything while at work, I tend to be in the wrong frame of mind and need to read the question properly.

I love your comment about the Pope. I’ll have to see if he will send me something.

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malcolm r

I have online savings accounts and the providers do email me when rates change, and when year-long deals finish (also in my diary to remind me) they recommend an alternative. However, these providers are businesses in it to make a profit, not to provide a social service. So you do need to put some work in to find the best current deal. If they have sufficient funds to meet their lending requirements they do not need to offer such attractive savings rates.
Putting money on deposit could be seen as a passive way of making money with no effort. An alternative would be to put your savings to active use – for example trading on ebay. You might get a better return by putting some work in to it.
I don’t mean this to be as blunt as it sounds – just looking at some options.

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wavechange

I have been victim of good interest rates being replaced my miserable rates many times and have only once recommended an alternative, when I took a passbook into a building society that had not made the transition into a bank.

Anyone buying shares should know about the need to keep an eye on the market, but large reductions in interest rates should not be allowed unless it is advertised as a fixed term product.

If a savings account becomes obsolete or the interest rate is due to drop dramatically, I want to be contacted and asked what I want to do with my money.

Companies do have to make a profit, but that should not be as a result of underhand tactics.

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John B

I would like to highlight some bad behaviour concerning a Post Office Online Saver Issue 8 savings account that I recently opened. They notified me by email on 23rd January that they had reduced the interest rate by 0.5% effective from 17th January. When tackled on this backdating they advised that they had had trouble with sending the email but they had advertised the change on their website and in the press. Not good enough in my book.
I then asked them to transfer my money to their Instant Saver account which is currently paying 2.1%. This is an account which can be operated on the internet but also by telephone and online. They refused to transfer the money and advised that I must get a form from the Post Office and apply this way as the account is not online only. Not customer friendly!
Finally, I was so exasperated that I decided to close my account. This can not be done on line but must be in writing by snail mail. I immediately transferred all the money in the account reducing it to zero. I then sent the letter closing the account in the post.

Please take these comments into account when publishing the next Which? customer satisfaction ratings.

Hi John B,
Sorry to hear about your experience with the Post Office. The FSA guideline for notification of a drop in interest is two months before, so I can understand your frustration at being told retrospectively about this. The Post Office really has let people down there. Without reliable and well-timed information from providers, it’s impossible for savers to make the most of their money. Not being able to close an online account online does seem rather illogical too.

Just to clarify, when it comes to our satisfaction ratings, these are based solely on customer feedback gathered via a six-monthly member survey. In the most recent results, the Post Office only scored 51%, so it seems fellow customers agree that there is significant room for improvement.

Out of interest, have you found another home for your savings yet?

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John B

Have I found another home for my savings? Answer, Yes. I have opened a Virgin Easy access E-Saver Issue 5 account. It was easy to open and there was no need to send proof of identity or proof of address. The interest rate is competitive at 2% variable and does not include a bonus rate. I could have got 2.1% with a Post Office Instant access account but there was no way I was going to give the Post Office any more business after my recent experience.
As a general comment isn’t it time that Which? put some pressure on to stop this stupid game of chasing interest rates. I have several savings accounts with different banks or building societies all for very good reasons and I find that to get a competitive rate, I am having to move my money on one or more of these accounts about once a month. i have better ways to fill my time. Many savings institutions have set themselves up to make moving accounts as bureaucratic and time consuming as possible. Government should step in to set some reasonable rules.

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Malcolm R

Interest rates are low partly because of quantitative easing, where banks have less need to tempt money from savers. They are commercial institutions who operate under market forces. Like other services, the onus is on individuals to find the best deals – whether it is savings, fuel, insurance or whatever. I don’t think it is reasonable to expect government to do this for us.
When hopefully the economy begins to recover we will still need to chase down the best deals. You can of course choose fixed term interest rate accounts to avoid regular changes; once a month seems excessively frequent. I have 1 year variable deals that I leave for 12 months and the difference in interest rates hardly makes it worthwhile changing.

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Ross H

I can’t believe a thread on plummeting savings rates has attracted so little interest (no pun intended). And I looked to see if there’s an e-petition on this and its relationship with Funding for Lending, and there is, at http://epetitions.direct.gov.uk/petitions/43658 but it has only got 57 signatures. Savers must be the most docile members of society. Or maybe times are so hard there are only 57 of us left!

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