Savers suffering as rate cuts bite deeper

Cuts in interest rates are hitting savers hard, while many reward account benefits now miss out on  the new personal savings allowance
Cuts in interest rates are hitting savers hard, while many reward account benefits now miss out on the new personal savings allowance
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Banks and building societies have been accused once again of failing long-suffering cash savers after it was revealed that they have made more than 700 cuts to savings rates this year already.

There were 143 rate reductions in April alone, the seventh successive month in which cuts have significantly outweighed increases, according to new figures from Moneyfacts.

Some accounts were slashed by as much as 0.55 per cent last month, more than seven years after the Bank of England base rate fell to 0.5 per cent. There have now been 716 rate cuts since the start of the year, with just 90 increases.

Savings returns have been driven down by a combination of factors including the low base rate, economic uncertainty and a lack of competition.

Competition for savings cash weakened dramatically when the “funding for lending” scheme was launched in 2012. The scheme, which was extended earlier this year, gives providers access to cheaper finance with which to fund mortgage lending, consequently reducing their need for savings deposits.

There appeared to be light at the end of the tunnel for savers earlier this year when the arrival of several new brands in the savings market enlivened competition for the top spots in the ‘best buy’ tables on comparison websites.

That was short lived, however.

“Essentially, this boils down to the failure of the main banks to compete with the new players and boost competition and rates,” said Charlotte Nelson, finance expert at Moneyfacts.

“The challengers make up only a small portion of the market, so their positive impact on the market was always going to be fleeting if the main players didn’t get on board.

Banks and building societies are also under fire for failing to make customers in their reward paying current accounts aware that those products aren’t eligible for the new personal savings allowance.

The paucity of returns on ordinary cash accounts has driven demand for the growing range of current accounts paying monthly cash rewards in exchange for certain deposit commitments.

They include accounts from banks including Bank of Scotland/Halifax, Barclays and the Co-op, which typically pay between £5 and £7 a month.

There’s a downside to these accounts that few savers will be aware of, however – they don’t qualify for the new personal savings allowance (PSA).

The allowance, which took effect last month, means basic rate taxpayers can now receive up to £1,000 in savings interest a year tax-free (with higher rate taxpayers getting a reduced allowance of £500 a year).

It covers interest received from savings, bank and credit union accounts, corporate and government bonds and peer-to-peer (P2P) products. But it doesn’t cover the fixed cash payments from reward accounts, an exception that banks have been slow to make customers aware of.

If the reward is paid as interest, it’s considered savings income and should now be paid without any tax being taken off it.

But if it’s a cash reward for depositing a certain amount each month, it’s classed as an annual payment rather than savings income and is taxed before being paid out. Only non-taxpayers can reclaim that tax.

“The situation is very confusing for taxpayers with certain types of reward accounts,” said Joanne Walker, technical officer at the Low Incomes Tax Reform Group (LITRG).

“If they receive any interest (whether on the reward account or on a different account), they should now receive that gross and it will be eligible for the PSA.”

The treatment of rewards depends on the nature of the reward, she explained, but it’s likely that account holders will get the reward after tax has been paid on it.

“There is limited guidance available to individuals, and the nature of the reward can vary from account to account.”

While the onus is on providers to give customers clear information about the type of rewards they pay, that doesn’t appear to be happening.

“It is not sufficient just to include such information in the small print, which many account holders will not read. The information must be included in the key facts about the account,” said Walker.

Bank of Scotland confirmed that all rewards are classed as annual payments for tax purposes and so are ineligible for the PSA.

“Bank of Scotland customers will start to receive information about the changes through the post next month. Information is currently available via our website,” said a spokesperson for the bank.