Money news, advice and predictions for savers and spenders. This week: bad news for savers.
By Jeremy Gates
The plunge in interest rates, likely to continue so long as a 0% rate looms, means older people relying on income from savings have seen a drastic cut in income in 2008.
Earlier in the year, several accounts paid 7%-plus. A one year AA bond, fixed at 7.02%, was oversubscribed in days, as recently as September.
How generous that rate looks today, after the two hefty cuts have sent Bank of England base rate plunging to 2%. With many accounts paying less than 1% after tax, and notice accounts and Cash-ISAs caught up in the carnage, some savers could struggle to earn £5 a year interest on £5,000 lump sums.
To confuse the picture, some banks and building societies have yet to respond to the Bank's latest cut - possibly to grab an extra slice of the savings cake from rivals who move earlier.
Kevin Mountford at www.Moneysupermarket.com says: "Banks and building societies rely on a back book of accounts held by lazy customers who don't realise their rates are squeezed to pay the headline rates to attract 'rate tarts' who keep moving money to catch the best return.
"Obviously there's a gulf between headline rate and average rate. Before the rate cut on December 3, savers earned an average 3.3% gross on their money.
"Now, we calculate it is 2.47% gross. The gap between this figure, and top accounts still paying 6%, is widening."
Kevin Mountford thinks higher rates will suffer soon: "In a low rate environment, there's a limit on how far providers can squeeze an existing savings book", he says.
"Banks currently have a strong appetite for retail savings, but pressure on better-paying accounts puts a question mark over their survival. Lock into a fixed rate ISA now, instead of waiting until March to beat the tax deadline."
Mountford likes Tesco's Easy Access account paying 6% on minimum £1 deposits - and yet to respond to December's cut.
He also tips one year fixed rate ISAs from Nationwide (4.75%, worth nearly 7% to higher rate taxpayers), Manchester BS, Birmingham Midshires and Kent Reliance BS (all 4.5%) which all look attractive in the current environment.
Andrew Hagger at www.moneynet.co.uk, also urges savers to act ahead of the Christmas shut-down.
"Act fast to lock in for 6-12 months", he says, "and you can still get something fairly reasonable."
Hagger tips 12-months bonds from ICICI Bank, at 5.75% or 5.40% for easier access. Leeds BS has a six month Postal Bond fixed at 5% until May 4, while Principality BS offers 4.94%, also on a minimum £1,000, over a similar period.
Among Cash ISAs, Hagger tips Egg (4.55% on minimum £1), Manchester BS (4.5% on £1000), Kent Reliance BS (4.26% on £1) and National Counties BS (4.21% on £1). All these rates are variable, and could be falling early in 2009.
Andrew Hagger says: "Anybody who amassed a lump sum of £50,000 for retirement has seen their income drop by £100 per month. If rates decrease much more, savers will begin to wonder if saving is worth the bother."
However, Michelle Slade at Moneyfacts.co.uk points out: "Banks and building societies can't afford to drive savers away, so the more competitive accounts won't pass on the latest cut in full.
"The problem is that rates were easy to overlook when savers were doing well. Now they must look closely at what their money is earning, to avoid derisory rates."
Slade tips the Manchester BS Instant Access account paying 5.26%; on a minimum £1,000 deposit, it guarantees to pay at least 4% until June 2009, and at least 1.5% over and above base rate until July 2010.
Anglo-Irish Bank offers a 5% fix for one year on £500-plus, and Leeds BS offers the same, on minimum £1,000 deposits, until May 4, 2009. Anglo-Irish Bank's Easy Access account paying 4.55% on £1 (and 4.65% on seven day notice money) have both been adjusted since the last cut.
Nationwide BS has re-priced bonds and e-savings products since December 3: now a four year fixed rate bond pays 4.30%, a three year Bond 4.10%, both gross.
Two and three year e-Bonds pay up to 4.20%, while Nationwide's one year Tracker Bond will exceed Bank rate by at least 1.75%.
Other accounts offer good rates, subject to specific conditions: Investec High 5 offers 5.61% gross, the average of the top five rates listed by Moneyfacts, on minimum £25,000 deposits.
Alliance & Leicester's e-Saver is a limited offer paying 5% gross per annum, or 4.89% (monthly income) provided there are no withdrawals.
Abbey's Super Fixed Rate Monthly Saver promising 8% gross - on regular monthly savings of between £20 and £250, is really for newcomers to the savings game.
Colin Jackson at Baronworth Financial Services, thinks rates are too low for many savers to accept.
"We may have to accept that the days of earning 4-6% on cash without risk are over", he says.
"Clients must either accept ridiculous returns on money which is entirely safe - or accept a degree of risk in the hope of doing a bit better."
Baronworth offers various structured products for savers who lock money up for specific periods: on minimum £10,000 deposits, an Investec One Year Range Deposit Account guarantees full return of capital after one year, plus income varying from 9% gross to zero depending on London's top shares.
If FTSE100, now around 4,300, ends the one year period between 3250 and 5250, the return is 9%. If FTSE100 ends between 2750 and 5250, the return is 7%, and between 2250 and 5250, the return is 5%.
If FTSE100 falls below 2250 - almost halving again from present levels - the original deposit is repaid with no addition. Up to £50,000, the deposit is fully covered by the Government Compensation Scheme.
Baronworth also offers a Keydata Defined Income Plan (Issue 7) on minimum £3,600 deposits: it pays 8.25% over five years, 8.5% over seven, or 8.75% over ten, with income available tax-free if held in an ISA wrapper.
However the original deposit is linked to the value of insurance contracts, rather than equities - which means the original capital is not guaranteed, and may be reduced if events don't unfold in the way insurers expect.
Colin Jackson says: "Earlier issues of this type are on track to repay the original capital in full besides high income. But there is no guarantee that this and future issues will match that performance."
My best bolthole for cash in the past year has proved to be HSBC Infrastructure Fund: it now pays 5.7% per year, with long-term income seemingly guaranteed by the Government-funded bodies which pay the fund to administer public services. My income appears to be secure, unless these bodies run dry of cash, or the Fund gets something terribly wrong.
Of course, HSBC Infrastructure shares can rise and fall - admittedly not by much, so far, in this crazy market - so the original investment will never be guaranteed.
:: INFORMATION: Baronworth (0208 518 1218); AA (0845 602 6203); Investec (0845 366 6333); Abbey (0800 234 6065).
POUNDNOTES
:: Are 191,000 small investors on the register of The Share Centre still keen to make new investments, after a disastrous year which has hammered their portfolios.
Investment advisor Nick Raynor clearly reckons they are - because he's devised a list of ten firms likely to benefit as people tighten their purse strings through the festive season and into 2009.
For brave souls, here it is: Diageo (960p); pawnbroker Albemarle & Bond (184p); British American Tobacco (1710p); insolvency specialist Begbies Traynor (139p); bookmaker Ladbrokes (189p); National Grid (642p); Morrisons (246p); bookmaker Ladbrokes (135p); HMV (103p) paying a 7% yield; and Halfords (239p) paying 6.6%.
However, Tim Steer, who runs the New Star UK Alpha Fund as one of the few success stories to emerge from that beleaguered fund manager, warns that "traditional forms of investment analysis" have been rendered virtually useless by the global credit crunch.
Steer pins some of the blame on hedge funds, often desperate to raise cash as investors ask to get out. It means that Babcock International, "a defensive company if ever there was one", saw its share price halved for no apparent reason last month ahead of a perfectly good set of results.
Steer says: "Hedge funds are mostly not to blame for the mess of the markets but their access to leverage (surely a thing of the past now), has amplified the problem."
:: Despite three significant Bank rate cuts over the last two months, personal loan rates are heading in the opposite direction, with six providers increasing rates in the last four weeks, says comparison service uSwitch, which points out that the cheapest loan at 8.2% APR is more than four times the Bank's base rate of 2%.
Moneyback Bank, which consistently offered table topping loans as low as 5.5% in recent years is closed to new business altogether.
Louise Bond at uSwitch says: "The death of the sub-8% best buy loan era is really bad news for consumers trying to consolidate debts."
uSwitch.com enquiries: 0800 093 05607 and www.uSwitch.com.
:: Homebuyers on interest-only mortgages might find this a good moment to switch to a repayment loan, says Cath Hearnden of independent mortgage advisors My Mortgage Direct.
Of the 1.3m borrowers are on interest-only loans, many won't have capital available at the end to pay off the loan. Switching to a repayment loan steadily reduces the debt and reduces the chances of negative equity.
My Mortgage Direct: 0800 953 060 and www.mymortgagedirect.co.uk.
:: Most people with money problems wait too long - until they owe more than 50% of income to creditors - before they seek specialist help, says John Fairhurst at Payplan.
He says middle aged debtors have the largest gap between income and outgoings - an income of £1,864 against expenditure of £2,452, making a deficit of £693. At the other end of the scale, 20-30 year olds have monthly deficits around £400.
Payplan enquiries: 0800 716 239 (six days a week) and www.payplan.com.
HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
Manchester BS 0161 833 8015 5.26% Premier Guarantee 2 None (P) £1,000 Yly
Whiteaway Laidlaw Bank 0161 833 5444 5.06% 60 Day Bonus 60 Days £1,000 Yly
Anglo Irish Bank 0845 455 2222 5.00% (F) Fixed Rate Bond 1 Year Bond (B) £500 OM
Principality BS 0845 045 0452 4.94% (F) Fixed Rate Bond 117 Six Month Bond (P) £1,000 OM
Scarboro BS 0845 634 3760 4.60% Balance Builder Issue 1 None (B) £1 Mly
TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 3.49% for term 80% £599 Yes
HSBC 0800 494999 3.64% for term 60% £799 Yes
Abbey 0800 100802 4.49% to 2/3/11 75% £495 Yes
Bank of Ireland Mortgages 0800 109010 4.49% for term 75% none Yes
Mansfield BS 01623 676345 4.79% for two years 75% £599 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T- Operated by Telephone
*W- Operated by Internet
*H- Operated by Internet/Telephone
*S- Available only to those aged 50 or over
*R- Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)
