Savers face years of hardship as interest rates look set to remain at rock bottom; Jeremy Gates looks at the likely effects of continued low interest rates for hard-pressed savers.
WHEN we cast our votes in May's general election, did any of us expect the new Government would preside over the toughest time for savers in living memory? That is how things could turn out if the prediction, by the Ernst & Young Item Club, that the Bank of England base rate (BBR) will remain at 0.5% until 2014 proves accurate.
The 0.5% rate, set in March 2009, is at its lowest level since the Bank of England was founded in 1694.
It was seen as a dramatic move by Gordon Brown to kickstart the economy ahead of the election.
Now it could have a much longer run. With the Governor of the Bank of England confirming that he wouldn't increase the base rate even if inflation rose, savers might be sacrificed for years, largely to avoid carnage in the housing market.
The new Nationwide BS savings index says "pessimism is creeping up on savers" who expect to be saving less in six months' time. Yet the number of consumers who say that the Government discourages them from saving has fallen since the coalition took over.
It is now certainly harder to find much reason to save. The average rate on instant access accounts is down to 0.68%. On notice accounts, tying money up for 30 to 90 days, it is 1.03%. Inflation, by any measure, tops 3%.
As rates plunged, savers turned to inflation-beating index-linked savings certificates from National Savings & Investments (NS&I), limited to pounds 15,000 per saver per issue. They guaranteed to match the rate of inflation over three or five years and pay an additional 1% on top, tax-free.
But the certificates, introduced in 1975, were withdrawn overnight because they sucked in pounds 11bn over five years and drained money away from banks and building societies.
Many people haven't yet realised how dramatically income from savings has collapsed.
Andrew Hagger, at Moneynet.co.uk, says: "In November 2008, it was still possible to get 7% on fixed rate bonds for one, two and three years, so there are still plenty of people to come off one of these excellent rates.
"They will be horrified that new deals on offer pay such a miserly return in comparison."
The bigger problem is that many savers don't know what their money actually earns.
A new survey by Moneysupermarket.
com says one in three savers never checks what rate their money is earning, and 57% have never switched their savings account.
This typically costs them pounds 245 lost income on pounds 10,000 worth of savings, or a whopping pounds 1,715 over seven years. In total, savers' lethargy costs a massive pounds 9.4bn a year.
Kevin Mountford, at Moneysupermarket.
com, says: "Generally speaking, if you opened a savings account over 12 months ago, you will probably find the account is now paying a much lower rate than you signed up for."
There is, perhaps, only one benefit in assuming that rock bottom savings rates are here to stay. Fixed rate bonds over three and five years look more attractive when a better offer is less likely to come trundling along next month.
Many savers previously avoided fixes, expecting higher rates would arrive this side of Christmas.
Now Bank of Baroda's internet bank savings accounts - five years at 4.9%, three years at 4.3%, two years 3.8%, and one year at 3.15%, all on minimum pounds 500 deposits - look more attractive.
The offer is open online through Moneysupermarket.com, although Bank of Baroda has more than 20 UK branches.
Another Indian bank, ICICI, has a similar range of fixes: 4.75% (five years), 4.15% (three), 3.70% (two) and 3.10% (one). Like Baroda, it is covered by the UK Financial Services Compensation Scheme (FSCS) which entitles savers to claim up to pounds 50,000 for the single named account or pounds 100,000 for joint accounts, the same protection as you get from other High Street banks.
Two new products this week will track BBR, so savers locking money away aren't left behind if rates rise.
Coventry BS's two year Bank of England base rate Tracker Bond, expiring in September 2012 on a minimum of pounds 1 deposit plus anything else paid in before September 30, starts at 3.20%, and stays 2.20% above Bank base rate, once BBR tops 1%.
Santander's Loyalty Tracker Bond (Issue 1), launching tomorrow, pays 3% gross and stays 2.50% above BBR until September 1, 2011, on minimum pounds 10,000 deposits. To qualify, customers need a main current account, mortgage or investment account with Santander, or they must open a new current account by switching through the Account Transfer Service.
For those who need more flexibility, options include the Post Office Reward Saver account, paying 2.5% variable (including 1% bonus for first 12 months) on minimum pounds 500 deposits with withdrawals free after 30 days notice, and AA Savings, paying 2.80% on minimum pounds 1. But the AA account includes a 2.3% bonus for the first year, so customers must switch then to avoid a derisory 0.5% return on their cash.
It is certainly However, Patrick Connolly, at financial advisors AWD Chase de Vere, thinks a critical moment has arrived in the savings market, with rates so far behind inflation that long-term savers can't really rely on cash alone.
harder to reasons "If you are ultra-cautious, stay in cash", he says. "But you will lose money. For anybody else, the best way to beat inflation is a diversified portfolio containing shares, fixed interest and property". to His view is that most savers need a pounds 5,000 cash "buffer" to deal with financial emergencies and then they should save a further pounds 5,000 to build a portfolio of managed funds.
Typically it will go to mainstream funds like Artemis Income, Schroder UK Alpha Plus, Cazenove European, JP Morgan US, M&G Corporate Bond, and L&G High Income, and even the racier JP Morgan Emerging Markets.
now Paul Killik, at brokers Killik & Co, thinks savers should note the large, well-covered dividends - despite these straitened times paid by Britain's global giants, such as British American Tobacco (5.1%), Vodafone (6.7%), and GlaxoSmithKline (5.5%).
Remember this Government has pledged to revive the private sector, so dividends should grow, and possibly before anybody remembers the plight of building society savers.
Killik's chosen funds include Invesco Perpetual Income, Veritas Global Equity Income and Law Debenture.
Others believe Threadneedle's Managed Income Fund can identify leading companies where dividends can be maintained or, preferably, increased to put more cash into investors' pockets.
TO make your baby a millionaire, pay pounds 88 per month into a self invested personal pension (SIPP) pot and the Government will top it up with a further pounds 22 in basic rate tax relief, according to Alliance Trust Savings.
Assuming an annual growth rate of 6%, the pension fund will then be worth pounds 1,009,000 at the age of 65, assuming basic rate tax relief is allowed at its current rate until then.
If parents pay pounds 240 a month from birth, and their child keeps up this level of saving, the pension pot could be a massive pounds 2.75m.
MANY savers don't realise when banks and building societies have slashed the rate on their accounts, says Which? Money, which found only four providers in its survey guarantee to personally inform customers of all rate changes. The 'good guys' are Cheltenham & Gloucester, First Direct, Co-op and ING Direct, which send either an email or a letter whenever the rate changes. METRO Bank opened its first branch in London this week, the first new High Street bank in more than 100 years.
Kevin Mountford, at Moneysupermarket.com, is underwhelmed.
New applicants must go into the branch to open an account, he says, and the lack of online account opening facilities will restrict Metro's g rowth.
Kevin Mountford of moneysupermarket.com Many people have not yet realised how dramatically income from their saving gs has collapsed