So, inflation has gone up. Unexpectedly, it rose to a 22-month high of 1 per cent this week, with the full force of a weak pound and other rising prices fuelling the leap.
This means more bad news for savers who are already concerned about the eroding power of inflation on their cash. The rise caused a bit of a shock, as many economists had predicted a much smaller increase to 0.8 per cent, up from 0.6 per cent the month before. Now adjusted analysis shows we could see inflation exceeding the 2 per cent target as soon as next year.
What does this all mean for savers? Well, there is currently very little choice in deals that pay 1 per cent or more, and it’s only going to get worse. There seems to be no end to savings rate cuts, with around 680 cuts made since the start of August.
Not only have savers borne the brunt of a Bank of England base rate cut, they also have to deal with scarce competition among providers thanks to government lending initiatives. As a result, less than half of the savings market now offers a return or 1 per cent or more. This is giving people little incentive to save and to shop around for the best deal among standard savings accounts. Instead, savers have to evolve and be much savvier in where they stash their cash. Current accounts have filled a gap for those who need easy access to cash but also desire a decent return. But even these accounts are condemned to cuts over the next few months.
Over the past few weeks, some of the biggest banks have announced they will be slashing the credit interest on the most lucrative accounts. Let’s examine how this will impact savers.
Santander’s 123 Current Account currently pays 3 per cent on balances between £3,000 and £20,000 but this will be cut in half to 1.5 per cent from November, meaning that on a £3,000 balance, savers will earn just £45 from November. Worse still, they will lose £300 in interest on the full £20,000 balance (and that’s without including the account fee).
In the same vein, Lloyds Bank will cut its Club Lloyds credit interest rate on balances of up to £5,000 from 4 per cent to 2 per cent in January, translating to a maximum earning of £100 from next year.
TSB will reduce its 5 per cent rate on its Classic Plus account to 3 per cent from January. To add insult to injury, this will only be payable on balances of up to £1,500, meaning an earning of £45 at most per year.
And Halifax will drop its lucrative £5 monthly reward payment on its Reward current account to £3 in February.
There is still some interest to be gained from the best high interest current accounts, and they may still prove a refuge in this low rate environment, but consumers will have to ensure they are earning enough to justify the account, particularly if it charges a monthly fee. Meanwhile, Nationwide is still paying 5 per cent on its FlexDirect on balances of up to £2,500 for 12 months, and Tesco Bank continues to pay 3 per cent on balances of up to £3,000 on its Current Account, so if you maxed out both accounts you could still earn £215 in one year.
Given what is happening to the economy, putting money aside will require careful planning and consideration. As an example, the best one-year bond pays 1.4 per cent from Atom Bank, but savers will need to use the bank’s mobile app for access. However, those who are comfortable saving by app will be able to earn more interest than on the majority of one-year fixed bonds out there. Better still, if customers opened an M&S Current Account, they would get access to a 5 per cent regular saver for 12 months, so if they are diligent with their savings goal, they can earn much more compared to sticking their cash in an easy access account.
Without doubt these are difficult times for savers. But it is still possible to chase down a best buy deal. Earning a realistic return is always preferable to letting cash languish in an account which pays next to nothing.
Rachel Springall is a Finance Expert at Moneyfacts.co.uk
Comments