Savers are paying the price for banks’ colossal mistakes. In most cases, banks’ customers are actually losing money holding funds in a savings account.
Research just published by MoneyNet reveals that eight out of ten savings accounts are paying less in interest than the current rate of inflation.
Take First Trust. A saver with less than £100,000 in a standard First Trust savings account earns interest at the paltry rate of 0.05%. Anyone holding £1,000 in one of these savings accounts for a year will be £14.50 worse off – in real terms, taking into account inflation.
The Bank of Ireland is almost as bad. Its ‘Classic Saver’ account pays a measly 0.10%. Northern Bank also pays a lowly 0.10% on its misnamed ‘Savings Account Plus’ and ‘Midas Gold’.
1.875% is the minimum
Andrew Hagger of Moneynet explains: “With CPI [inflation] now back up to 1.5%, a basic rate taxpayer will need to secure a rate of at least 1.875% gross to maintain the spending power of their savings pot.” Yet, he says, his firm’s research shows that 78% of variable rate savings accounts fail to pay a real return.
“With inflation rising sharply, savers need to check their rate to ensure they’re not losing out – anything less than 1.875% for a basic rate taxpayer and the value of their cash is being eroded. For a high rate taxpayer you need a gross rate of at least 2.50%.”
Hagger adds the warning that banks and other financial providers often win custom by claiming higher headline interest rates on savings accounts, but these rates are artificially boosted by short-term bonuses. Citibank is at present paying a very good 3.25% gross on its instant access flexible saver, but after a year this falls to a less competitive 2.25%.
Equally important, savers need to keep a close eye on financial institutions cutting interest rates once an account has been opened. According to research from Investec Private Bank, many banks offer excellent rates for a short period of time, appear at the head of the best buy tables, take the custom and then reduce the interest rate.
Investec’s analysis covered 44 weeks between January and November this year, examining 36 savings accounts provided by 26 banks and building societies. All were listed in the top five of best buy tables. Yet the analysis reported that 13 of the accounts were in best buy tables for a single week, and 72% of the best buy accounts were in the top five for no more than five weeks.
It seems a cynical way to treat savings customers and illustrates the need for savers to constantly monitor the rates paid. Linda McBain, head of banking at Investec Private Bank, says: “Although a number of accounts continue to pay a higher rate of interest than the Bank of England base rate, there is little stability in the accounts that are paying the highest rates. This means that what can be a market leading rate today, may well be mediocre tomorrow.”
Investec, of course, is making the point that its own account offers 3.36% and is committed to track the best accounts on the market. However, as a private bank its High 5 Account requires a minimum deposit of £25,000 and has little relevance for most savers.
But there are other ways of earning good returns on savings accounts. In a low interest rate environment, credit unions are outperforming many banks on savings accounts. Because credit unions are financial co-operatives, they do not pay fixed returns, but instead a dividend based on trading performances.
Last year, the average dividend from credit unions in Northern Ireland was 3%. It will probably be less this year, but should still be comfortably higher than the lower savings rates offered by banks here.
Seek and you shall find
Good savings accounts are around. “We have a range of interest-bearing accunts available,” points out a spokesman for First Trust. “These include a fixed term account which pays up to 4%.”
Ulster Bank’s savings products earn more than some of its competitors, but it, too, advises customers to choose the right account. A spokesman for Ulster Bank points out its Pathway account pays 3.6% gross for six months, including a 1% six month bonus, making it the top gross variable account in the UK.
“Ulster Bank has a wide range of competitive savings products, including our Pathway account and the Ulster Bank Bonus Saver,” says the spokesman. He adds “there is no correlation between the cost of funds against which banks price their products and inflation” and argues that given the Bank of England base rate is only 0.50%, savings rates are actually reasonable.
However, this is a difficult time for banks. Their mistakes have devastated the wider economy and a legal decision expected this week may conclude they exploited their customers in making excessive charges on unauthorised overdrafts. If the banks want to recover lost goodwill, a good place to start would be to ensure that all their savings accounts pay a reasonable return.
Question: Gordon Brown plans to reform the tax relief available to working parents through the childcare voucher scheme. He proposes to abolish tax relief on childcare vouchers by 2015 – the very scheme that Labour extended in 2005 to enable working parents to benefit from both tax and National Insurance exemptions on the cost of registered childcare. I am appalled. JH.
Answer: You are not alone. The tax relief is worth up to £2,400 a year to working parents and some 80,000 people signed an online petition on the Prime Minister’s website. The Government now says ‘it will listen’ to critics of its proposals, but that it remains concerned that the main beneficiaries are top rate taxpayers. It still plans to phase out the tax relief, while not removing it from parents who currently receive it. The intention is to reallocate the cost of the tax relief which applies across the UK to fund more free nursery places for children of poorer families – in England.