SAVERS have been warned to act fast to snap up a competitive deposit rate after the returns on one-year accounts hit a 14-month low last week — and experts said they could fall further still.
The average rate paid on a one-year fixed deal has fallen to 2.63% from an eight-month high of 2.85% in April, according to Moneyfacts, the data firm.
Typical rates on all other fixed accounts for terms of two to five years have also dropped from the 12-month highs they reached in January, separate research for The Sunday Times shows.
The average three-year fix has fallen from 3.47% six months ago, to 3.37%, while the average five-year fix is down 0.19 percentage points to 3.94%, Moneyfacts said.
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Consumers with an existing fix that matures soon will see returns crash when they switch to a new account. For example, the top fixed account in June 2007 was the five-year Web Saver from Halifax, paying 6.37% a year. A £50,000 balance would earn gross returns of £3,185 a year. But with today’s top-paying five-year fix, from State Bank of India at 4.5%, annual returns would drop to £2,250 before tax.
Savers will be even worse off if they fail to act when their fixed-rate accounts expire, as banks and building societies transfer deposits into holding accounts paying as little as 0.05%.
Norwich & Peterborough building society, for example, paid 5.9% a year on a five-year fix in 2007. Someone with £50,000 in such an account will be getting gross income of £2,950 a year. However, if on maturity their cash is put into a holding account, currently paying just 0.1%, they will get annual gross interest of only £50.
Sue Hannums of savingschampion. co.uk, the adviser, said: “Savers who had been enjoying a decent rate of interest will be in for a huge shock when their accounts mature. They need to note when a fix matures and take action.”
Providers have slashed returns and pulled accounts as swap rates, which are used to fund such deals, have plummeted amid the euro turmoil and economic weakness in Britain.
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Bank rate is set to be held at 0.5% on Thursday. George Buckley, chief UK economist at Deutsche Bank, said money markets are now pricing in the first interest rate rise for around the middle of 2015. Last month, markets expected a rise in the second quarter of 2014.
Richard Norman, director of savings at the Post Office, said: “I think we will see fixed rates drift downwards from here.”
Keep an eye on fixes
The best rate on one-year fixed accounts is now 3.45% from United National Bank. If you have £25,000 or more, you can get 3.6% from Cahoot, the online arm of Santander.
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Providers differ in what they do with money in maturing fixes if a customer does not make a choice. Savingschampion said Lloyds TSB will automatically roll consumers into a new fixed account of the same term as the previous one. However, you have only 14 days to change your mind — after which your money will be locked away until the account matures.
Nationwide puts maturing funds into its Capital Builder account, paying just 0.2%. HSBC puts the money into a servicing account with rates ranging from a derisory 0.05% to 0.75%. If you withdraw money, the rate will fall from 0.75% to 0.25%.
Louise Holmes of Moneyfacts said savers need to move fast to exploit the best deals and must watch terms and conditions.
Consider instant access
Nationwide reduced the headline rate on its Mysave Online Plus account from a table-topping 3.17% to 3.06% on Friday, while Coventry building society withdrew its Online Saver account, which paid 3.15%. West Bromwich building society, C&G, Sainsbury’s bank and Virgin Money have all cut rates in the past month.
Although average instant-access rates have been creeping up, banks are increasingly boosting them by using introductory bonuses, which typically expire after 12 months and cause returns to nosedive afterwards. There are now 75 accounts on the market with a bonus, up from 73 this time last year, while the average bonus has grown from 1.16% to 1.29%, said Defaqto, the research firm.
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Experts predict that without a change in Bank rate, easy-access rates will stay fairly static, but bonuses will be more common.
As part of our Fairer Deal for Savers campaign, Money is lobbying for banks to offer “clean” easy-access savings rates that do not include an introductory bonus.
Beware the catches
Figures from Defaqto show that 81 supposedly easy-access accounts — 17.5% of the market — limit the withdrawals savers can make. David Black of the research firm said: “If you exceed the specified number of withdrawals, you will typically get a reduced rate of interest, loss of a bonus element, or the account will be closed and transferred to a lower-paying deal.”
For instance, the Mysave Online Plus from Nationwide pays 3.06%, including a 1.52% bonus fixed for 12 months. However, you are permitted only one free withdrawal a year. Further withdrawals mean you lose the bonus and get a rate of 0.1% for the month you take out the money.
We are also calling for providers to stop launching easy-access accounts that limit the number of withdrawals.
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Support our campaign: email money@sundaytimes.co.uk