Savers have been dealt a double whammy of blows this month.
The Bank of England cut interest rates from their already-record low of 0.5 per cent down to a paltry 0.25 per cent, which is likely to have an impact on the already poor levels of interest paid on savings accounts.
The 0.5 level was considered an emergency measure when it came into effect in 2009, and this latest cut is supposed to help ward off a Brexit induced recession, but it’s savers that are paying the price through low returns on their cash piles.
Inflation has also started to creep up. The sharp weakening of the pound this year is raising the cost of everyday items and the Bank of England expects inflation to reach two per cent, and probably surpass it too. It makes saving money in inflation-beating accounts even more important.
“July’s rise in inflation to 0.6 per cent is likely to herald further rises in the cost of living, as the price of imports increase following the fall in the pound post Brexit. Clearly this is not good news for the pound in peoples’ pockets and makes life even more difficult for those looking to save for their financial future,” says Calum Bennie, savings expert at Scottish Friendly.
More bad news came in the form of the decision by Santander to halve the interest available on its hugely popular 123 account. Since March 2012 it had been paying out an attractive 3 per cent on balances up to £20,000 – which meant £600 a year interest for people holding the maximum. That attracted nearly 500,000 customers. But clearly both the high demand for the account and the Bank of England’s rate cut have made the payout unsustainable.
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From November the account will pay just 1.5 per cent. It’s disappointing, and the question for many will be whether they should switch.
The account has a £5 a month fee, which was raised from the previous £2 a month charge in January. Account holders will have to balance how much they have saved, and the likely interest they’ll receive, against the £60 annual fee. There are savings interest calculators available online.
Someone saving the full £20,000 in the account will only earn £240 a year after the annual fee is taken out. Judging the rewards from the account are slightly complicated, because it pays a tiered rate of “cashback” of 1-3 per cent on household bills paid. That too adjusts how much someone can earn.
“Santander 123 has been a beacon, shining out for those with a decent chunk of cash,” says Martin Lewis, founder of MoneySavingExpert.com.
The bank has offered a light to customers with smaller savings, though. Accounts with up to £1,000 in will now qualify for interest payments, whereas previously they would not.
“On the upside, those with smaller deposits will actually be getting a better deal. A person with between £100 and £500 in their bank will be getting between £5 and £7.50 more after 1 November,” says Jody Baker, head of money at Comparethemarket.com.
For people with savings of between £10,000 and £20,000, Santander 123 is still attractive. It is among the highest paying online accounts with easy access.
“The reality is, the 123 account remains one of the most competitive on the market. The likes of Nationwide and TSB offer better rates, but on a much lower amount of £2,500 [or £2,000 at TSB]. So in the meantime, Santander will still remain competitive,” says Kevin Mountford, banking expert at MoneySuperMarket.
Judgment can be passed on Santander this winter, when we know which other banks have decided to cut their savings interest too. “Unfortunately, it is likely Santander is just at the vanguard of rate cuts. Its main competition, the other banks with high interest accounts, may well cut those too,” says Lewis.
Confusingly, the highest interest available to savers looking for easy-access (as opposed to locking it away for a fixed term) is from current accounts, rather than straight-up savings accounts.
This means the accounts come with other terms attached, as typically a normal savings account with unlimited access would have few conditions, apart from maybe a monthly savings requirement.
It’s a sign of the odd times we live in, but also means people have to study the small print to get their savings to work for them.
It can be helpful to spread savings around different accounts. TSB’s (below) is one of the most generous on the market when all perks are taken into account, and could be used alongside another current account for maximum interest.
£3,000 TO £5,000 SAVED
Bank of Scotland is paying three per cent interest on balances of between £3,000 and £5,000 held in its Classic Account. Unlike Santander, there’s no monthly fee. To qualify for the high interest rate, savers have to deposit £1,000 in the account each month and not go overdrawn. Two monthly direct debits must also be set up, and the interest works out as a maximum £148 per year.
Tesco Bank’s current account pays 3 per cent interest on balances of up to £3,000. That’s a maximum £89 a year. The debit card that comes with this account also doubles up as a Tesco Clubcard, and the perk is holders get extra points just for using their debit card in the normal way. Points convert into vouchers, which is useful for people who shop regularly at Tesco.
UP TO £2,000 SAVED
TSB is offering a massive 5 per cent interest on up to £2,000 held in its Classic Plus account. That translates as up to £97 interest. It has a minimum monthly pay-in of £500, which could be paid via direct debit from another account. The other perk is that for the first £100 spent each month on a contactless card, account holders will get an extra 5 per cent cashback, or £5.