Low base rate puts savers into account-raiding mode

THE agony for savers deprived of vital savings income since interest rates hit a record low last year looks set to continue into 2011 after the Bank of England voted against a base rate rise.

With the consumer prices index (CPI) measure of inflation running at 3.4 per cent, savers need to lock their money away for at least a year to stand a chance of securing real returns. But a base rate rise was never likely this week and although one member of the Monetary Policy Committee, Andrew Sentence, last month voted in favour of an increase to 0.75 per cent, most experts believe there will be no significant change for some time.

There are currently no conventional savings accounts paying above inflation and the rates available on the best fixed rate bonds have slumped in recent weeks, severely reducing the options for savers. The average fixed rate bond now pays just 2.36 per cent, according to Bank of England figures, compared with 3.02 per cent a year ago and over 6 per cent in July 2008, when interest rates were above 5 per cent.

Returns from the instant access savings accounts average just 0.22 per cent - albeit the highest since November 2008 - and the typical cash individual savings account (Isa) pays 0.7 per cent.

The best savings deals on offer for those happy to leave their money out of reach for a period include a five-year bond from ICICI that pays 4.75 per cent and a three-year fix from Lloyds at 4.10 per cent. ICICI also has a two-year bond paying 3.7 per cent and both Barnsley Building Society and Northern Rock have one-year fixed rate bonds at 3 per cent.

Vicky Redwood, an economist at Capital Economics, advised savers to stick to short-term deals, given the prevailing uncertainty in the market. "The difference of 1.5 pc before tax between short-term savings and five-year bonds is not a huge amount of compensation for tying your money up for years."

Lower returns from fixed rate bonds mean more savers are turning to tax-free Isas. Newcastle and Nationwide building societies are both promoting 2.75 per cent accounts, while the AA and Birmingham Midshires are among the providers with 2.7 per cent rates.

The depressed returns are forcing more people to dig into their existing savings. Almost 40 per cent of savers took money out of their rainy day funds in the three months to July, with an average of 1,870 withdrawn, up from 1,499 in the opening months of the year, according to Birmingham Midshires.

Emergency home or car repairs, holidays, overspending on current accounts and unexpected energy bills were the main reasons given for piggy bank raids.

Savings made over the same period reached just 764, 26 per cent below the average put away in the first quarter. Over 55s have been hit hardest, taking an average of 2,284 from their savings.

John Bianco, head of Birmingham Midshires Savings Products, said: "Despite raiding increasing in the last quarter, this falls far short of the all-time raiding high this time last year of over 2,000. In addition, those who are raiding their savings are doing so for essential reasons such as emergency repairs and increased utility bills rather than spending on luxury items."

However the continued low interest rates are better news for borrowers on trackers and standard variable rates (SVRs), despite recent moves by lenders to increase their SVRs and make their best fixed rate products more attractive.

Ray Boulger, senior technical adviser at mortgage adviser John Charcol, believes long-term fixed rate mortgages currently offer a good deal for borrowers looking for a new deal and wanting some interest rate security. "Anyone on a good long term tracker mortgage with borrowings in excess of 500,000 who wants some interest rate security should consider buying a 5 year cap as an alternative to switching to a fixed rate," said Boulger.zz