April is proving one of the cruellest months for savers, whose rates on their accounts have been slashed.
Research for the Observer by savings website Savingschampion.co.uk found that by halfway through this month, banks and building societies had made nearly the same number of interest rate cuts they made in the whole of March.
Traditionally, at the start of the new tax year, banks and building societies try to tempt savers with new accounts or higher rates, but this month rates on 66 savings accounts have been cut, compared to 82 for the whole of March.
Virgin has cut the rate on its Access 120 account from 1.60% to 1.40%, while Ulster Bank has reduced the interest paid on its cash Isa from 0.75% to 0.50%.
Nationwide Building Society has slashed rates on nearly 30 of its savings accounts, with rates in some cases dropping by half a percentage point, despite no change in the Bank of England base rate for more than six years. The rate on the building society’s Cash Isa 2 has been reduced from 1% to 0.5%, while the rate on its e-Isa has fallen from 1.25% to 0.75%.
A spokesman for the building society claimed that it was bringing its savings rates in line with the rest of the market. He said: “While we sympathise with savers, it is not sustainable to continue offering rates significantly higher than our competitors. Despite this, we have worked hard to ensure we remain as competitive as possible, especially when compared to equivalent accounts offered by other high street providers.”
According to Moneyfacts.co.uk, two years ago the average cash Isa paid 1.82%. This fell to 1.64% last year and has now hit 1.48%.
“Savers have suffered in recent years with continual rate reductions,” said Susan Hannums, director at Savingschampion.co.uk. “Whereas it looked like these were slowing down in March, April has kicked off with large numbers of cuts that have sadly become the norm.
She added: “The increased number so far this month is driven mainly by Nationwide, which only goes to highlight that even the good guys are in on the act and no saver is immune to seeing a rate reduction.”
Given low savings rates, it’s hardly surprising that according to MoneySuperMarket half of savers are now shunning savings accounts altogether in favour of high interest-paying current accounts.
“Savers continue to struggle due to the all-time low base rate environment and the fact that providers have stock-piled cash,” said Kevin Mountford, head of banking at MoneySuperMarket. “As such consumers are looking for alternatives and the carrot of high current account ‘in-credit’ interest rates is proving to be attractive.”
For example, TSB’s current account pays 5% on the first £2,000 you hold in the account. You must pay in £500 a month.
Alternatively, Santander’s 123 account pays 1% on balances between £1,000 up to £2,000, 2% on balances from £2,000 up to £3,000 and 3% on balances over £3,000. There’s a monthly fee of £2 and you have to pay in £500 a month and set up two direct debits. Rather than offering interest, Halifax’s Reward Account pays a monthly £5 reward. There’s also a £100 switching incentive, meaning over the year you could pocket £160 in total.
Later this week Barclays is joining the fray by launching a bank account that pays a monthly £4 reward to those who pay in at least £800 a month and have two direct debits paid out of the account. Mortgage customers who are signed up will also receive £5 a month and customers who take out or renew their home insurance with Barclays will receive an extra £3 a month back as a reward.
In comparison, the top easy access savings account currently available is Virgin Money’s Defined Access E-Saver account, paying 1.41% on a minimum investment of £1. Make four or more withdrawals from this account and the rate reverts to 0.75%.
The West Brom’s Direct Limited Access Saver account is the next most competitive easy access savings account, paying 1.4% on a minimum investment of £1,000. You can make up to six withdrawals a year. If you make more than this, the rate drops to 0.5%.
Top Isas
Despite rate cuts this month, it’s not all doom and gloom for savers. Hannums said: “There is some light at the end of the tunnel with a smattering of providers launching competitive Isas for the start of the new tax year.”
Skipton Building Society, for example, has just launched a limited edition cash Isa paying 1.6% tax-free. The account can be opened online with £1 and you can transfer money in from existing Isas. There are no withdrawal restrictions.
West Brom Building Society has bucked the trend of falling rates by increasing the interest rate on the WeBSaveR Limited Access Isa from 1.4% to 1.55%, affecting both existing account holders and those opening new accounts. Three withdrawals are allowed per year, but if you make more than this the interest rate drops to 0.75% for the remainder of that year.
Islamic bank al-Rayan currently offers some of the most competitive fixed-rate Isa returns, with its 12-month fixed term Cash Isa, launched earlier this month, paying an indicative profit rate of 1.9% quarterly on a minimum investment of £1,000. The account is Sharia compliant, which means the earning or paying of interest is forbidden, but it is not restricted only to Muslims.
“With Islamic accounts, instead of the bank using the savers’ funds to lend and passing on some of the interest to the saver, the bank will instead use the money in ways that is consistent with their beliefs to generate a profit, which is then passed on to the customer,” said Charlotte Nelson from Moneyfacts.
The account can be opened and operated in branch, by post, by phone and online with a minimum deposit of £1,000. However, there are downsides. While the rate on the account may look high, this is the expected profit rate and therefore is not guaranteed. Unlike traditional accounts it is possible to make a loss.
“It is important to note, however, that while the rate of return is not guaranteed, your funds are protected by the Financial Services Compensation Scheme,” Nelson said.
If you don’t want to tie your money up for a year, al-Rayan also offers the top rate on a variable Isa, paying an indicative profit rate of 2% to those willing to give 120 days’ notice to access their funds. This account can be opened with a minimum investment of £250.
