Prospects of an Isa season upturn for savers are receding as banks and building societies mark five years of the 0.5 per cent base rate by keeping cash returns at rock-bottom.
Cash savers have lost out on billions of pounds of interest payments since the Bank of England lowered the base rate to 0.5 per cent on 5 March 2009.
Consultants McKinsey estimates the hit to savings returns at £65 billion, while the Save our Savers campaign claims that some £326bn has been lost to inflation and low interest rates over the past five years.
And the decline in returns accelerated dramatically with the launch of the funding for lending scheme (FLS) in August 2012. By giving lenders access to cheaper borrowing, the FLS reduced their need for cash deposits from customers.
“It’s been a thoroughly miserable five years for savers, with returns depressed as the government concentrated on keeping mortgage rates low,” said Andrew Hagger, founder of Moneycomms.co.uk. “The FLS was a hammer blow as rates plummeted to new depths from which they’ve yet to recover.”
Basic rate taxpayers currently need a rate of 2.38 per cent to beat inflation, falling to 1.9 per cent on tax-free accounts. But savers now have to lock their money away in long-term fixed- rate offers to get a rate equivalent to that paid five years ago on an ordinary savings account.
Yet more money is going into instant-access accounts that pay derisory rates of interest than into cash Isas and fixed-rate deals that at least pay returns around or above the base rate.
The top instant-access account currently pays just 1.5 per cent, compared with 3.35 per cent five years ago, according to Moneyfacts. That accounts to a £19 loss in returns even before inflation and tax is factored in.
“Today you would have lock in for seven years to receive a rate of 3.5 per cent,” said Rachel Springall, spokeswoman for Moneyfacts.
Research by Moneycomms shows that the collapse in Isa returns has been similarly alarming, particularly in the wake of the FLS taking effect. The top instant access Isa today is 1.75 per cent, down from 2.5 per cent a year ago and compared with 3.3 per cent in March 2012, before the FLS was introduced.
The fall in fixed rates over one, two, three and five years has also been dramatic, illustrating the damage inflicted on savers by government mortgage market stimulus.
There was some hope that mutuals (including building societies) would pick up the slack, but that hasn’t materialised, according to Springall. “Mutuals have gone back to the days of old by restricting deals to their local area so that they can cope with the demand from customers seeking out decent returns.”
Savers were given a glimpse of light at the end of the tunnel in January when eligibility for the FLS was restricted to business lending. But there is no indication yet that lenders are returning to retail deposits for funding, even as the annual Isa allowance deadline approaches.
“It may take some time for lenders to use up the FLS monies before seeking a new source of funds,” said Hagger. “Fixed-rate best buys across the board from one to five years have hardly moved in the last three months and instant access rates have, if anything, dipped slightly.”
He warned that savers face a long wait before returns on cash accounts approach the levels of even two years ago.
Springall agreed. She suggested that current accounts rather than conventional savings accounts will prove the most fruitful hunting ground.
“Over the next 12 months, savers will find lenders such as first direct, HSBC and M&S Bank offering 6 per cent on fixed regular saver deals if they hold a current account, and with the current account switcher guarantee, consumers may be more inclined to take the leap to a better deal,” she said.