There was growing anger this week after almost half a million older savers who put money into the government’s pensioner bonds had their interest rate slashed in half.
There was huge demand for the bonds when they went on sale in January, and the carrot of a table-topping rate – 2.8% – prompted 470,000 people to pile into the one-year version. But this week it emerged that when the bonds mature these savers will be automatically moved into another one-year savings account paying a much lower rate – 1.45%.
Customers who don’t want to accept this offer will be given 30 days to find a new home for their money. And, considering there are lots of products out there paying more than 1.45%, that’s exactly what people are being urged to do.
The National Savings & Investments pensioner bonds – known officially as 65+ guaranteed growth bonds – went on sale on 15 January this year, and were available until just after the general election in May.
Consumer body Which? blasted the 48% rate cut as a “shocking move”. Likewise, Andrew Hagger of financial website MoneyComms, says: “There was no promise that the 2.8% rate would continue, but I don’t think anyone anticipated such an uncompetitive rate to be dished up a year down the line. The pre-election sweetener has turned sour; the government got what it wanted and has once again turned its back on savers.”
It looks highly likely that over the coming weeks and months, billions of pounds ploughed into the one-year pensioner bond will start flooding out of NS&I’s coffers and into savings accounts offered by some of the “challenger” providers which have far more competitive rates. So where should people move their money to?
This week there were more than 25 one-year bonds paying in excess of 1.45% – though none of them offer a rate anything like as good as 2.8%. On Thursday the top-paying one-year fixed-rate bond, from FirstSave, the UK arm of First Bank of Nigeria, was offering a rate of 2.12%. Close behind was RCI Bank (part of a French-based group) and Shawbrook Bank (based in Brentwood, Essex) with one-year products paying 2.06% and 2.05% respectively.
To get a higher fixed bond rate you will need to tie your money up for longer. NS&I’s five-year standard guaranteed growth bond pays 2.55%, while there are a variety of fixed-rate bonds running from five to seven years that pay 3%-plus. For example, Malta-based AgriBank, which describes itself as a specialist lender to UK farmers, was this week topping the table with a five-year fixed-rate bond paying 3.15%.
The other bit of bad news relating to the one-year pensioner bonds is that the terms and conditions have quietly been changed, so that people now can’t call up on the phone to tell NS&I what they want to do with their maturing bond cash. “If you are registered for our online and phone service you will be able to give us your maturity instructions online or by post, but not by phone,” a spokesman says.
Many pensioners will have cheered the move this week by the Federal Reserve in the US to raise interest rates for the first time since 2006. Historically, the Bank of England has tended to follow US rates closely, so are better times for savers just around the corner? Should you hold off locking your money into fixed-rate accounts if building societies are about to put up rates here?
Don’t bank on it, say the experts. “Anyone waiting for rate rises is going to be seriously disappointed – you will be waiting a very long time,” says Sue Hannums of rate-monitoring site Savings Champion. “The sentiment we are hearing from banks is that they are awash with cash at the moment and don’t need to compete for savers’ money.”
She blames the government’s Funding for Lending scheme, which means banks have easy access to money without having to offer better savings rates. “Interest rates have not budged for years, but it was only in the last three years that [savings] rates really plummeted, and that was because of Funding for Lending. Until we get real competition back into the market, and banks need the money, you won’t see rises.”
Funding for Lending stopped in the retail market two years ago, but it is still available for banks lending to businesses, and its impact remains huge, Hannums says.
It is evident from the best-buy tables produced by data provider Moneyfacts that the major high street names in the UK are not bothered about offering competitive rates to attract savers. Remarkably, there is not a single well-known UK bank or building society in the tables for savings accounts. The names at the top paying 2% or more interest – such as the aforementioned FirstSave, AgriBank and RCI Bank, plus Al Rayan, Fidor, Ikano, Axis and Milestone – will be completely unfamiliar to most savers, and have few if any branches in the UK. Below, we highlight who these banks are and what they are offering.
Savers wanting a better-known brand have very little to choose from. The Post Office is paying 1.25% on its easy access account, but that falls to a miserable 0.1% after 12 months. Tesco is paying 1.21% but that includes a 0.46% bonus that falls out after 12 months, leaving customers making just 0.75% on their deposits.
It is testament to how far interest rates have fallen that an account paying 0.5% from Halifax, which drops to 0.25% after a year, actually makes it into the top 10 best-buys for easy access accounts.
Astonishingly, the best savings rates are no longer to be found in savings accounts but in current accounts. “Santander’s 123 account is still the best option for many savers, even after increasing its fee,” Hannums says.
The account pays 3% interest on balances above £3,000 through to £20,000, plus cashback on a range of bills. But you have to pay in a minimum of £500 a month, set up two direct debits and, crucially, from January must pay a fee of £5 a month, up from £2 currently.
Other banks that offer decent interest rates on current accounts are Nationwide, whose FlexDirect account pays 5% interest, but only on balances up to £2,500, and TSB’s Classic Plus, which also pays 5%, but only up to £2,000. Both require that you pay in minimum amounts each month.
Tesco Bank’s current account is interesting as there are no minimum requirements on you to pay money in or to set up any direct debits. It pays 3% gross on balances up to £3,000.
Finally, although the outlook for better rates may still be cloudy, there is good news on the tax front. The new personal savings allowance starts in April next year which will allow savers to earn up to £1,000 in interest tax-free if they are a basic rate taxpayer, or £500 if they are a higher-rate taxpayer.
The best-buy banks you’ve never heard of
• Ikano Bank was originally part of Ikea, which was founded by Ingvar Kamprad in 1943, and managed financial services for the home furnishings group. In 1988 it became independent of Ikea but remains under the ownership of the billionaire Kamprad family.
Ikano has been in the UK for 20 years and runs the store card for Ikea as well as Warehouse, Oasis, Karen Millen and New Look, plus tie-ups with Tesco and builders Barratt. According to its 2014 annual report Britain is its fastest growing market, accounting for most of the growth in its £1.3bn of lending. Its deposits are substantially lower, making up only 58% of its financing, so it borrows from the wholesale capital markets to cover the rest. That may explain why it is keen to attract savers, with a three-year bond paying 2.55% which has gone straight into the best-buy tables.
If the bank collapses savers will have to rely on the Swedish Deposit Insurance Scheme managed by Riksgälden. This protects deposits up to €100,000 (£72,700) but is dependent on the Swedes making the payments – the British have no responsibility for it – although compensation would be channelled through the Financial Services Compensation Scheme. When Iceland’s banks went bust there was a local investor compensation scheme in place, but it was overwhelmed and unable to pay British savers.
• AgriBank was set up to offer loans to farmers in the UK, and to take deposits, but is registered in Malta. It has a best-buy bond paying 3.15% fixed for five years. Savers are protected by the €100,000 Maltese Depositor Compensation Scheme, but if this fails there is no further automatic protection. Malta’s total GDP in 2013 was £6.5bn – to put that into perspective, £6.5bn is half the total savings balances at Skipton building society.
• Axis Bank is a wholly owned subsidiary of India’s third largest bank, Axis. Its two-year 2.27% bond is in the best-buy tables. The bank’s UK subsidiary is regulated by the Financial Conduct Authority, so its savers have the protection of the FSCS compensation limit, currently £85,000 but falling to £75,000 in January.
• RCI Bank is part of the Renault Group in France and lends more than £2bn a year in the UK, largely to car buyers. Its two-year 2.35% savings bond is a best buy. Savers have to rely on the €100,000 cover provided by the French deposit protection scheme, not the UK’s FSCS.
• Fidor, derived from the Latin for trust, is a six-year-old online German bank. Customers are covered by Germany’s €100,000 compensation scheme.
• Al Rayan, formerly the Islamic Bank of Britain, is a sharia finance bank which does not pay interest but “an expected profit rate” that currently puts it at the top of the two- and three-year savings bonds tables. Its parent group is in Qatar but it is regulated in the UK, so savers come under the FSCS in the event of a default.
• FirstSave accounts are provided by FBN Bank UK Ltd, whose parent company is First Bank of Nigeria. It is authorised in the UK and comes under the FSCS.
