Savers still facing rate shocks
Andrew Hagger of Moneynet.co.uk looks at the current state of the savings market and the rate shocks that some consumers are still coming to terms with.
It's almost 2 years to the day since the previous government ramped up its savage base rate cutting strategy with an eye watering 1.5% reduction (6 Nov 2008) - since then it's been one long nightmare for savers desperately trying to find a decent home for their savings.
Repercussions still being felt by fixed rate bond customers
The rates available and interest income for consumers coming off existing fixed rates are still in some cases drastically lower as per the following examples:
2 years ago you could find a 2 year fixed bond paying 7% gross from Anglo Irish Bank and ICICI - Best 2 year rate today is 3.65% with Post Office. (On a £20,000 bond your return net of basic tax would fall from £2240 to £1168 over the 2 year term).
3 years ago you could fix for 3 years with Yorkshire Bank at 6.65% - Best 3 year rate nowBank of Cyprus UK at 4.15%. (On a £20,000 bond your return net of basic tax would fall from £3192 to £1992 over the 3 year term).
4 years ago a 4 year fix with Halifax was available at 5.60% - Best 4 year deal now is 4.20% with Nottingham BS. (On a £20,000 bond your return net of basic tax would fall from £3584 to £2688 over the 4 year term).
Latest savings market overview
The double blow of ultra low interest rates and stubbornly high inflation is makes it virtually impossible for savers to get a real return on their cash without locking it away for three years or more.
With CPI at 3.1% you need to a savings account paying a minimum of 3.875% gross (basic tax payer) or 5.166% (40% tax payer) for your savings to maintain their spending power.
Rates for instant access savings have picked up slightly in the last few weeks, but in many cases the rate includes a sizeable bonus that disappears after 12 months so savers need to make a note in their diary to switch in a year's time, recent movements in the fixed rate market however has seen rates drifting slightly lower.
It's also worth highlighting that the margin between the best 3 year and the best 5 year fixed rate deal has recently narrowed to just 0.35% and offers little incentive to lock your cash away for an additional two years.
To make the most of your savings, it's essential to keep a close eye on rates and be prepared to switch accounts once a year in an effort to maximise your return. If you're apathetic you may find your once ‘best buy' rate has drifted away to virtually nothing, leaving your bank to profit at your expense.