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

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?