Dismal interest rates putting consumers off saving

As many as 14.6 million consumers are not actively saving money and low interest rates are partly to blame for this, according to the latest research from MoneySuperMarket.

While 78 per cent of people have stated that they cannot afford to save, a further fifth (18 per cent) put it down to the fact that interest rates are so low at the moment it is not worthwhile them doing so. Eleven per cent used to save but because of languishing rates they now don’t see the point, and seven per cent who blame low rates have never been savers.

Out of those who say low interest rates are responsible for their lack of savings, interest of £222 per year on average would kick-start their savings habit again. However, further insight has revealed that consumers require a hefty deposit to earn this amount in interest even with the leading cash ISAs, easy access savings accounts or fixed rate bonds.

For example, NS&I’s Direct ISA offers an AER of 1.50 per cent, however savers still need to invest a whopping deposit of a £14,669 to amass an annual interest amount of £220. Similarly, BM Saving’s Online Extra, and RCI Bank’s recently launched Freedom Savings Account both offer an AER of 1.50 per cent, meaning a deposit of almost £15,000 is required to build up just £220 in interest in 12 months.

Anyone opting for a fixed rate bond would still need a sizeable deposit too. Secure Trust Bank’s Fixed Rate Bond has an AER of 3.01 per cent so savers need £7,325 in there to accrue £220 in interest, but would need to tie up their savings for five years to achieve this.

Kevin Mountford, head of banking at MoneySuperMarket said: “Savers have suffered for some time now due to low interest rates, but it’s really concerning that this has stopped some people saving altogether. Although ISAs, easy access accounts and fixed rate bonds might not be providing massive returns, saving a little amount money is far better than saving none at all. ISAs come with tax free benefits, so it is worth stashing some cash away, even if the interest isn’t quite what you’d hope for. In addition, ISA rates have slowly begun to creep up, and hopefully we’ll see this continue, and providers will start ramping up their offerings as a result.

“Comparing rates that are on offer is crucial, many of the best buy accounts come from newer, challenger banks therefore, savers should consider their loyalties to the main banks if there’s better on offer elsewhere. Deposits into most of the newer brands would be covered by the Financial Services Compensation Scheme (FSCS), posing no risk to savers looking to move.

“Alternatively, current accounts are an attractive alternative to save money, and many providers are taking advantage of the poor savings rates at the moment by increasing their offers and benefits to entice customers. Now you can earn as much as £150 cashback just for switching, and several current accounts pay better rates than some savings accounts at the moment, so it’s worth considering these to get more for your money.”