Savers suffer as Isa rates plunge

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BANKS have been accused of turning their backs on struggling savers as the interest paid on individual savings accounts (Isas) continues to plunge.

The UK’s high-street banks and building societies have axed their best savings deals over the past few months, replacing them with products paying far lower returns.

Among the biggest culprits is state-backed Royal Bank of Scotland, rewarding long-suffering customers with savings rates well below inflation.

Bank of Scotland customers lose out too, as the market-leading Isas offered by fellow Lloyds Banking Group brand Halifax are no longer available in branches north of the Border.

It was hoped that the start of the new tax year would inject competition into the cash Isa market as the 2013-14 tax-free allowances came into play. But, if anything, the outlook has become even more bleak for savers, who for more than four years have suffered at the hands of inflation and the 0.5 per cent base rate.

The average cash Isa now pays out just 1.8 per cent, down from 2.65 per cent a year ago, according to new figures from Moneyfacts (see table on page 18).

What had been the top deal – the 2.6 per cent rate paid by Coventry Building Society’s Poppy Isa – was pulled from the shelves on Thursday just two weeks after launch, due to heavy demand.

The top deals now are the 2.3 per cent Isa Saver from Cheshire Building Society and the 2.25 per cent Easy Saver Isa from Derbyshire Building Society. Both plunge to just 0.5 per cent once their short-term bonuses expire.

That contrasts markedly with the options open to savers a year ago, even though the Bank of England base rate has remained unchanged.

In April 2012, the top two Isas – from the AA and Cheshire Building Society – each paid 3.5 per cent, including short-term bonuses. Several other providers were promoting cash Isas offering between 3 and 3.3 per cent, including Santander.

Equally startling is the drop in the returns on fixed rate Isas over the past 12 months. A year ago, a saver willing to leave their money locked away for a period will have been rewarded with an interest rate of 4.15 per cent by Halifax’s five-year fixed rate Isa. Now the top five-year return is just 3.1 per cent. The best four-year fixed rate has been slashed from 4.35 to 3.05 per cent over the same period, while the leading three-year fix is down from 4.25 to 3 per cent.

Halifax and Bank of Scotland deals were aligned until 2011, when Bank of Scotland launched its own range. That has proved bad news for savers in Scotland, as the Halifax offers distinctly more competitive rates. While the Halifax Isas are available online to UK residents, those who prefer to do their banking in-branch must settle for less.

The best deal Bank of Scotland can offer is 2.2 per cent on a fixed rate two-year Isa. Its variable rate Isa pays 1.75 per cent and plunges to 0.5 per cent after a year when the one-year bonus disappears.

That’s better than Royal Bank of Scotland, however. Its online-only deals pay 1.75 per cent (on balances up to £9,999) and 2.25 per cent on balances of £30,000 and above. But its main instant access Isa pays just 0.55 per cent. Only savers with balances over £50,000 get a better rate, and then just 2 per cent.

RBS savers prepared to leave their cash out of reach for a while fare little better, getting 1.8 and 2 per cent on one and two-year terms respectively.

Andrew Hagger, personal finance expert at Moneycomms.co.uk, said: “For some providers, the Isa offering has been little more than ‘going through the motions’ and offering a product because they feel they have to. “Savers keen to tuck away their new allowance have seen best-buy Isas in which they were planning to save disappear before their eyes.”

The lack of appetite among banks and building societies for offering decent savings deals stems largely from the introduction last summer of a government scheme aimed at boosting the mortgage market. By giving lenders access to cheaper finance, the Funding for Lending Scheme (FLS) has helped reduce mortgage rates in recent months. Savers have paid the price, however. Banks and building societies taking advantage of the FLS no longer need to pull in savings deposits to use for loans.

The FLS has been described by the Save our Savers campaign as the “final nail in the coffin” for cash savers, and banks have been accused of using it to rip off loyal savers.

Critics point to the gap between the £13.8 billion that banks have taken through the FLS and the £2.7bn fall in lending reported by the Bank of England for the final three months of last year.

For those watching their cash being eroded by inflation, the chances of any improvement in savings returns any time soon would seem remote, judging by the current trend.

“The government constantly reminds us that it wants us all to save more for our retirement, but if it can’t create an economic environment to stimulate the short-term savings culture, the long-term savings aspirations that George Osborne may have for this country haven’t got a hope in hell,” said Hagger.

One hope is that inflation will fall and give savers a better shot at securing real returns on their cash. But with figures published last week showing the consumer prices index (CPI) measure of inflation lingering stubbornly at 2.8 per cent, that’s currently out of the question for those sticking to conventional cash accounts.

Someone putting £10,000 into the average savings account five years ago and being taxed at 20 per cent would have just £8,870 to show for it now, according to Moneyfacts.

Not one taxable savings account pays out enough to keep pace with inflation, while just a handful of Isas manage to do so (all of which involve leaving your money out of reach for at least three years).

Sylvia Waycot, spokeswoman for Moneyfacts.co.uk, said: “Anyone looking to save will need to do their homework first, because despite it being full-blown Isa season there are, depressingly, only seven Isa accounts that beat tax and inflation out of 248 Isas on the market.”

Twitter: @vaughansalway