Money news, advice and predictions for savers and spenders.
By Jeremy Gates
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 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 £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But the certificates, introduced in 1975, were withdrawn overnight because they sucked in £11 billion over five years and drained money away from banks and building societies.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 check what rate their money is earning, and 57% have never switched their savings account.
This typically costs them £245 lost income on £10,000 worth of savings, or a whopping £1,715 over seven years. In total, savers' lethargy costs a massive £9.4 billion 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 £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 £50,000 for the single named account or £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 minimum £1 deposits 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 on August 2, pays 3% gross and stays 2.50% above BBR until September 1, 2011, on minimum £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.
Barnsley BS's Fixed Rate Online ISA pays a fixed 3% until December 2011. Cumberland BS's two year ISA is fixed at 3.25, while Birmingham Midshires pays 4.25% fixed over five years.
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 £500 deposits with withdrawals free after 30 days notice, and AA Savings, paying 2.80% on minimum £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.
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.
"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."
His view is that most savers need a £5,000 cash "buffer" to deal with financial emergencies and then they should save a further £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.
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, 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.
:: Information: Nationwide BS (08457 302010 and www.nationwide.co.uk); ICICI Bank (08081 314151 and www.icicibank.co.uk); Santander (0800 587 2764 and www.santander.co.uk); AA (0845 603 6302 and www.theaa.com); Barnsley BS (0845 120 0898 and www.barnsley-bs.co.uk); Coventry BS (0845 7665522 and www.thecoventry.co.uk); Post Office (0800 169 7500 and www.postoffice.co.uk/savings); AWD Chase de Vere (0845 140 4014 and www.awdchasedevere.co.uk).
Poundnotes
:: To make your baby a millionaire, pay £88 per month into a self invested personal pension (SIPP) pot and the Government will top it up with a further £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 £1,009,000 at the age of 65, assuming basic rate tax relief is allowed at its current rate until then.
If parents pay £240 a month from birth, and their child keeps up this level of saving, the pension pot could be a massive £2.75 million. Not quite in the league as outgoing BP boss Tony Hayward, but enough to avoid trouble in old age.
Steve Latto, head of pensions at Alliance Trust Savings, says: "A significant number of parents are already using an Alliance Trust Savings SIPP for their children to take advantage of the tax relief and flexibility that SIPPs offer."
:: 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.
Other major banks only guarantee to notify customers if the rate cut exceeds 0.25%, or if a series of smaller cuts total more than 0.5% over a year. Nationwide BS, the biggest building society, makes no commitment whatsoever in its terms and conditions to notify customers of rate changes.
Which? chief executive Peter Vicary-Smith says: "Outdated and inconvenient methods of notice on rate changes are keeping savers in the dark for longer, at a time when they need greater disclosure than ever before."
Barclays, however, refutes the Which? criticism, and says it has notified customers of all rate changes since November 2009.
:: Metro Bank opened its first branch in London this week, the first new High Street bank in more than 100 years and determine to shake up its established rivals.
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 growth.
Mountford says: "Longer opening hours, safety deposit boxes, debit and credit cards, new cheque books printed in store, and water and biscuits for dogs are all positive factors to help customers, but all that glitter is not gold."
:: After the 42% surge in household energy bills in 2008, comparison service uSwitch.com reckons 1.1 million electricity customers and 0.8 million gas customers are officially repaying a debt, with the average debt standing at £277 for electricity and £287 for gas.
Ann Robinson, director of consumer policy at uSwitch.com, says: "Latest statistics raise a huge question mark over the ongoing affordability of our energy. Our research shows over 5.5 million households owe money to suppliers and looking ahead to the end of the year, some six million consumers say they will struggle to pay household bills on time."
:: High five savers
Phone No Rate Account Period Deposit Interest paid
ICICI Bank www.hisave.co.uk 4.75%% (F) HiSAVE Fixed Rate Five Year Bond £1,000 Yly
Aldermore 0845 604 2678 4.56% (F) Fixed Rate Account Five Year Bond £1,000 Yly
Close Savings 0207 392 1772 3.15% Premium Gold 180 Day 180 days (B) £10,000 Qly
Stroud & Swindon BS 08457 252423 2.90% 90 Day Notice 90 Days £1,000 Yly
AA www.theAA.com 2.80% Internet Extra 3 None £1 Yly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
Saffron BS 0800 072 1100 2.25% for two years 75% £995 Yes
First Direct 0845 610 0100 2.29% variable for term 65% £99 Yes
ING Direct (UK) 0845 603 8888 2.60% disc to 31/08/12 70% None Yes
Yorkshire BS 0845 120 0874 2.99% to 31/07/12 75% £995 Yes
Hinckley & Rugby BS 0800 774 499 3.49% for term 80% £795 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).
:: Please note: This is a resend of FINANCE Finance Column transmitted on July 30, adding HIGH FIVE SAVERS and TOP FIVE BORROWERS tables. Editors should use this version.
