In his last ditch appeal to the electorate before May's general election, the chancellor George Osborne has announced that if the Conservatives win power then the first £1,000 of savings interest would be tax-free, meaning 95% of savers would pay no tax. He added that the government would top up savings for a deposit for a first-time buyer mortgage by £50 for every £200 saved. The new Help to Buy ISA accounts will come into force this autumn and be made available through banks and building societies – another step towards the ‘savings culture’ he says he wants to foster.
Looking back to 2009, many things have changed: Eyjafjallajokull, a volcano in Iceland, began erupting and sent a cloud into the air that blocked air travel in and out of most of Europe; the ‘Arab Spring’ led to governments being overthrown in Tunisia, Egypt, and civil war in Libya, and challenging governments in Yemen, Syria and elsewhere; there was no such thing as an iPad; and average London house prices were under £300,000.
One thing has remained constant in this period of change – low interest rates. It has just been the sixth anniversary of the cut that put the base rate at 0.5%, its lowest level since records began in 1694.
In 2009, the best rates for savers were 3.5%; they’re now down to 1.5% for the easy access accounts. In 2012 the Bank of England introduced the FLS (Funding for Lending Scheme), allowing access to cheap money meaning they no longer relied upon savers’ deposits.
Cutting the base rate brought the savings rates down, then the FLS made competition in the savings market difficult - which halved the rates to the lowest rates on record, causing approximately 3,000 savings rate cuts for consumers.
‘Challenger Banks’ have emerged over these last few years providing a bright spot in a dark time for savers. One such challenger, Charter Savings Bank, is paying rates up to 2.5% gross. This includes an Easy Access variable account paying 1.25%; a 95 day notice account paying a variable 1.75%; and a one-five year fixed-rate bonds paying 1.8% to 2.5%.
Currently, the best buys for notice and fixed-rate accounts are, in fact, all products from these challenger baknks. Charter Savings, Shawbrook, Aldermore, and Paragon all pay between 1.6% and 1.75% on a notice account, with lesser-known banks such as Punjab Bank, Vanquis and UBL offering the best buys for fixed bonds, paying between 2% and 3% for a one-year fix over five years.
Mainstream banks have, however, now introduced current accounts as a ‘savings account’. Savers are offered 5% on their money in current accounts with TSB and Nationwide, and 4% with Lloyds. They vary in requirements as to how much can be paid each month, but have become popular for many people as savers are desperate to make the best of a bad situation.
Savers don’t seem to have any further good news for the near future, and can only wait for the Bank of England to increase the base rate. Even then, I am not entirely confident that savers will feel any meaningful benefit even when the rates do rise.
