Big banks worst offenders as peer-to-peer lenders lead the way, says Jeff Salway
The interest rates on savings accounts have been cut yet again by the UK’s high street banks, with no signs of light at the end of the tunnel for long-suffering cash savers.
The returns on tax-free cash individual savings accounts (Isas) fell to a record low last month, according to new figures from the Bank of England.
It also warned this week that interest rates, now held at 0.5 per cent for seven years, could remain unchanged until late 2017.
While rates are “more likely than not” to rise over the next two years, Bank governor Mark Carney said they could even be lowered again.
The plunge in cash savings since the financial crisis has cost savers around £160 billion in interest payments, Hargreaves Lansdown estimates. There is now £164bn languishing accounts that don’t pay any interest, compared with just £33bn eight years ago, according to the firm’s analysis of Bank of England data.
The situation has deteriorated since the turn of the year.
There were 138 savings rate cuts in January and just 21 increases, new Moneyfacts figures show, with some deals slashed by as much as 0.75 per cent. The biggest cuts last month came from Barclays, Tesco Bank, Nationwide and Lloyds Banking Group brands including Bank of Scotland and Halifax.
Three quarters of easy access accounts now pay 1 per cent or less, while the rate on the average two-year fixed rate bond has almost halved since 2011 to 1.72 per cent.
Charlotte Nelson, spokeswoman for Moneyfacts, said: “Savers seem to be on a never-ending spiral of misery when it comes to getting a decent return of interest.
The start of 2016 has been yet another disappoint as providers are cutting rates yet again.”
The big high street banks are the worst culprits. The recent extension of the Bank of England’s funding for lending scheme gives banks access to cheaper finance with which to lend and means they don’t need deposits from savers. “This in turn causes smaller less-known providers to rise up the best buys tables, but these often get snapped up quickly, so providers have no choice to cut the rate or withdraw the product from the market,” Nelson explained.
The best deals are currently offered by a raft of challenger banks, such as RCI, Aldermore and Charter Savings Bank, which are “propping up” the market, according to Moneyfacts.
The big banks are “not even in the same ballpark as the best buy savings rates”, said Andrew Hagger, finance expert at Moneycomms.co.uk.
“For example, on a one-year fixed-rate bond you can earn 1.81 per cent - fully protected by the Financial Services Compensation Scheme (FSCS) - with Charter Savings Bank, yet the one-year bond from Royal Bank of Scotland pays less than half this rate, at 0.8 per cent,” Hagger said.
“On a two-year bond you can earn 2.15 per cent with Axis Bank (also FSCS protected) yet RBS is paying just 1 per cent and Bank of Scotland 1.1 per cent. The difference in rates is huge and people need to move their money away from the big names as the rates are simply derisory and they are losing out.”
The alternatives to traditional savings deals include current accounts, although these come with conditions such as minimum monthly balances. TSB pays 5 per cent on the first £2,000, Tesco Bank 3 per cent up to £3,000 and Santander’s 123 account offers 3 per cent on balances between £3,000 and £20,000 (despite a recent fee hike to £5 a month).
Peer-to-peer lenders are another option, paying far more more interest on cash than banks and building societies. These firms, such as Zopa, RateSetter, Lending Works and Funding Circle, allow savers to earn interest by lending to each other or to businesses. Savers using peer-to-peer sites don’t currently have access to either the FSCS or the Financial Ombudsman Service, but the regulator is now consulting on removing that restriction.
“There’s no FSCS protection but so far nobody has lost a penny, so it’s worth considering perhaps for a smallish sum to start off with,” said Hagger. “Lending Works is currently paying 4.7 per cent for three years and 6.3 per cent for five years, while RateSetter is paying 3.2 per cent on its monthly option and 4 per cent for a one-year bond.”