Savers continue to see the returns on banks and building society accounts tumble – at a time when higher inflation starts to bite.
Research from Moneyfacts.co.uk found that nine out of 10 savings accounts now pay less than 1% interest, and more than a third of these accounts (34%) pay less than 0.25%.
Banks have clearly been reducing interest rates over the past year – following the decision by the Bank of England to reduce the Base Rate to 0.25% in August last year.
A year ago, just seven out of 10 of these savings account paid less than 1% - while a fifth (22%) paid less than 0.25%.
This contrast is even more stark when looking at the returns paid on cash savings five years ago: in June 2012 one in two ‘easy access’ accounts paid more than 1% - even though the Base Rate was only marginally higher, at 0.5%. Just a quarter of accounts paid less than 0.25%.
The Challenge of Getting Inflation-Beating Returns
Rachel Springall, finance expert at Moneyfacts.co.uk said: “It’s clear to see that savers have been facing a never-ending battle to get a decent return on their cash over the past few years.
“Government lending initiatives and consecutive cuts to bank base rate have resulted in savings rates plummeting. To add insult to injury the Governor of the Bank of England’s view is that there will not be a rise to interest rates in the foreseeable future as ‘now is not yet the time’ to raise the base rate.”
Springall said there was a “fundamental flaw” in the savings market – with a distinct lack of competition among the biggest banks for savers’ cash. “Easy access accounts are one of the most popular methods of saving and so it is devastating that 90% of them don’t even pay a 1% interest rate.”
Lack of Banking Competition
The big four banking groups have a combined 70% market share of the current account market – according to the Competition and Markets Authority. Many of these offer an easy access account that neatly sits alongside a current account – so some savers could be forgoing better interest from the convenience.
Moneyfacts points out that NatWest’s easy account account, for example, pays just 0.01%, while Ulster Bank pays 1.25% of its easy access account – giving savers substantially more.
Springall adds that evidence suggests that 80% of savings account have not been switched within the last three years, so many savers will be missing out on potentially better returns. “Savers not proactively monitoring their savings accounts could be earning next to nothing on their money. Still it’s difficult to blame savers for their apathy when rates remain so low.
“These are testing times and savers who are frustrated with earning very little in cash might turn to alternative investments. For example, the average return on Cash ISAs over the past year was just 0.97%, while over the same period the average stock and share ISA returned growth of 16.5%.” Those who are prepared to lock away their money and shoulder a higher degree of risk may want to explore other investment options she said, particularly with inflation rising and little prospect of a rate rise soon.
