Savers have been struggling to find much in the way of real net returns ever since the Bank of England base rate fell to 0.5 per cent in 2009. But since the introduction in August 2012 of the government's £80bn Funding for Lending scheme (FLS), which enables banks and building societies to borrow very cheaply from the Bank of England with a view to boosting mortgage lending, the savings arena has become an altogether more treacherous place.
Although savings rate levels have historically been a function of the base rate, four years at 0.5 per cent has not affected the savings account market with anything like the suffocating influence of the FLS. "The low base rate didn’t stop savings rates changing and new products being launched, because banks and building societies still needed to raise money from savers in order to fund mortgage lending, so they had to compete on rates to attract cash," explains Anna Bowes, director of savingschampion.co.uk.
But lenders are now awash with very cheap government cash (available at rates as low as 0.25 per cent) and don’t need to compete for savers' money. Indeed, because the rates at which they can borrow from the government are so low, they are anxious to avoid offering the best rate, because they'll attract more customers' money and will have to pay more for it than they would for government cash. As a consequence, savings rates have been slashed. For example, the top easy access account before the introduction of the FLS last summer paid 3.25 per cent; now the best available is 2 per cent.
As a consequence of all these account changes, it can be difficult even to establish what your account is currently earning
"When the FLS was first introduced we saw a lot of current product issues withdrawn, although existing customers could stay at the same rate. Lenders brought out new issues of those products at lower rates for new customers," explains Ms Bowes. But more recently there has also been increasing evidence of cuts in the rates for existing customers on issues closed to new business. Historically, savings account customers have not normally seen changes to the prevailing interest rate on their account unless the base rate moves.
As a consequence of all these account changes, says savings expert Sylvia Morris, it can be difficult even to establish what your account is currently earning. ‘Providers have launched strings of new accounts with similar names, or even the same name with different issue numbers. Or they use the same name for the account but the rate differs depending on when the account was opened.’
Most recently, Sylvia Waycot, finance expert at Moneyfacts says that providers are no longer just cutting savings rates on products, as they were a couple of months ago. Instead they are pulling entire products, as they find that constantly reducing rates is not enough to remove them from best buy tables and concomitant high demand. In total over 190 savings accounts were pulled in November 2012 alone. "It's easier and reputationally safer for a bank or building society to take a top-paying product off the market altogether, rather than risking it being oversubscribed as desperate savers scramble for it," says Ms Waycot.
Decline in accounts
A recent Moneyfacts round-up of the availability of easy access and notice accounts since last August demonstrated the profound impact of the Funding for Lending scheme on the choice available. At the start of August 2012 there were 470 easy access accounts; five months later, at the beginning of January, that had dropped to 416. A similar decline was evident among notice accounts, with numbers down from 263 in August to 212 by January.
Accounts paying bonuses are a particular target for providers. Ironically, it's not long since bonuses used to be considered something of an irritant by many commentators, because they boosted the rate artificially for a set period, after which savers then had to remember to move their money again to find a better rate. But Ms Bowes believes that the bonuses still attached to some accounts are becoming increasingly attractive.
"There are accounts where the bonus will be the saving grace keeping the interest rate up, because if the bonus is a fixed rate for a set period of time, as most are, it cannot be slashed by the bank in the interim," she says.
It's vital to maximise your tax-free holdings, monitor the rate you're receiving, look out for best buys and switch as necessary
But both the number of bonus-paying products available and the size of bonuses have been slashed. There were 73 easy access accounts last August, paying bonuses of up to 2.7 per cent; at the start of January that had fallen to 46 accounts and the best bonus rate available was 2 per cent. Among notice accounts, the number paying a bonus had more than halved and the top bonus had declined from 2 to 1.25 per cent.
"We have less choice than we had five months ago, the rates are very much poorer, and the introductory bonus has all but disappeared as banks shy away from attracting the attention of desperate savers," says Ms Waycot.
Nor is there much sign of savings rates improving in the foreseeable future. Commentators do not expect the bank base rate to rise any time soon: for instance Vicky Redwood, chief economist at Capital Economics, suggests it could be mid-2015 before there's any movement. The FLS itself runs for 18 months (unless the £80bn has all been lent out before then), but providers have a further four years in which to lend the money they’ve borrowed, so the effects on retail savings rates are likely to persist into that period.
Of course, the difficulty for savers is not simply that rates are low and getting lower. That would not matter so much if they remained ahead of inflation. But with the consumer price index (CPI) stuck stubbornly at 2.7 per cent for the past three months, there is not a single taxable no-notice, notice or one-year bond that pays that much, even before tax - and after tax is taken into account, not even the best five-year bond (paying 3.1 per cent gross from Shawbrook Bank) keeps pace with inflation.
In other words, consumers are seeing the real purchasing power of their cash deposits steadily diminish. As Adrian Lowcock, senior investment adviser at Hargreaves Lansdown, points out, in three years to mid January, CPI inflation has risen by 11 per cent, while the average cash account has only returned 3.2 per cent - so savers are almost 8 per cent worse off in real terms. "Savers are losing the battle against inflation; they need to make sure the interest earned on cash is able at least to keep pace with it, but that is getting much harder," he comments.
What savers can do
The obvious step is to make use of your annual cash Isa allowance, which will shelter up to £5,640 free of tax this tax year and a further £5,760 from April. But here too the choice is very limited.
Anna Bowes identifies six Isas that beat or keep pace with inflation, but most have major restrictions. Three of the six (First Direct, Marsden, BM Savings) require a minimum £40,000 or £50,000 holding to earn the inflation-busting rate; HSBC pays top rate (2.75 per cent) on just £15,000, but makes the Isa available to HSBC current account holders only; and Earl Shilton, although its 90-day notice Isa pays 2.7 per cent on £10-plus, does not accept transfers in.
Arguably the best deal is the Coventry BS 60-day notice Isa, which accepts as little as £1 and pays 2.8 per cent, including a 0.6 per cent bonus for 12 months - but again transfers in are not permitted.
So there's little cheer overall: you're very likely to be losing money in real terms if you hold cash at present, so it's vital to maximise your tax-free holdings, monitor the rate you're receiving, look out for best buys and switch as necessary.