New weapon to boost savings rates

The financial watchdog the FCA is barking and growling at banks over the way they let down customers over savings rates.

In too many cases the saver is left languishing on a pitiful rate, given little information on how bad it is and seldom encouraged to shop around for something better.

So the FCA has devised a shiny new weapon to cow savings providers into behaving better. When they write to you with a regular statement they will have to include a "switching box" which shows in a colourful chart how bad your rate is, how much more you could get from the provider's other accounts and what you could earn from the average of the best ten savings accounts on the market.

Here's what the box could look like:

Another innovation is that when you get the account in the first place they'll have to include a warning if the rate is a poor one, saying it pays "interest below the bank of England's base rate".

The watchdog has retreated with a whine and a lowered tail from drastic measures such as banning the introductory bonus rates which makes accounts seem attractive at first but leave you stuck on a measly rate later.

But the switching box could be a big embarrassment for banks and building societies which take advantage of gullible customers.

All the measures are up for consultation.

How to get a Pensioner Bond

Pensioner Bonds are an exclusive investment for the over-65s with a rock solid government guarantee and market-beating rates of interest. But how can you get them?

When are Pensioner Bonds available?

They won’t be available until January and we won’t be told the exact day on which applications open until that day actually dawns.

For that reason, it’s a good idea to register on the National Savings & Investments website, if you haven’t already, to receive the information. Here is the link.

Which is the best way to apply?

When the day comes in January, you will have the choice of applying over the internet (via National Savings), by phone or by post.

There could be a rush to apply, so the postal method could take too long. Funnily enough, you would have to download the form or phone up for it in any case.

Many will opt for the internet, as long as the website doesn't freeze up, rather than risk being held on the phone for ages.

Which bonds should I buy?

You can put between £500 and £10,000 in a fixed rate 2.8% one year bond and between £500 and £10,000 in a 4% three year bond.

Obviously most people will have less than £20,000 to salt away and a large proportion will be investing less than £10,000.

If you are one of those and wondering which bond to choose, it is worth noting that the three year bond appears to pay a better rate of interest even if you cash it in after a year and pay the penalty of 90 days interest.

But both of them pay more than equivalent bonds from banks and building societies.

What do I need to have with me when I apply?

If you are applying over the internet or by phone, you will need to have your debit card handy. It has to have your name on it.

You will be asked to give your bank details and to enter your address.

They might send you a form by post for you to sign and confirm the application.

Applying by post, you would have to get hold of the form, fill it in and send it back with a cheque.

When will they take the money?

If you apply online or over the phone, the investment is deemed to have started on the same day, even if they ask you subsequently to complete a confirmation form by post.

You will receive confirmation by email or, if you choose, in a letter.

If you apply by post, the investment would start on the day the application is received, assuming in both cases that the bonds haven't been over-subscribed by that time.

When will I get my interest?

The interest is paid on maturity, in other words at the end of the investment term, or when you cash in the bond.

So it's a good way of salting money away for a decent rate of interest, but not much use if you are looking for an account which pays you interest every month.

Savers losing out

The financial watchdog, the FCA, says that millions of savers are losing out by letting their money sit for years in accounts with low interest rates.

It is calling for ideas on how to encourage switching between accounts and to make it easier to compare interest on offer.

Banks and building societies take advantage of people's unwillingness to shop around by offering higher rates to new customers.

The average interest rate on easy access accounts opened in the last two years was around 0.8%, but that the equivalent rate for accounts that were opened more than five years ago was less than 0.3%.

The FCA highlights the fact that providers come out with new versions of savings accounts with higher rates and leave loyal customers languishing on the old rates. 

Many have attracted customers with bonus rates which only last a year.

But the watchdog also blames savers for not bothering to look for better deals.

It says they tend to keep their savings with the bank which provides their current account.

The average savings rate from leading current account providers is around 0.5%, but the equivalent rate offered by other providers is 1.2%.

People have more savings than we thought

The savings held by UK households have been underestimated by a significant margin, according to the Office for National Statistics.

Since 1997 the savings ratio - the proportion of income saved - should have been 3% to 6% higher per year.

So last year's rate of just over 5% was, according to a new, more accurate measure, between 8% and 11%.

Britons have long been criticised for not saving enough, but this new basis for calculating the rate would bring our savings habits more in line with those of countries such as Germany.

The reassessment reflects the growing value of employer-provided pension schemes rather than people setting aside more cash.

Experts had underestimated the funding needed to pay for salary-linked pensions, particularly for former workers in the private sector and local government.

Hence, the pot of savings households will enjoy in retirement is bigger than previously shown in the National Accounts.

The new method of calculation is in line with a worldwide standard being adopted across Europe this year.

Savings rates plummet

It's true: banks and building societies really have been cutting the rates they are prepared to offer to savers, as a result of the government's much-trumpeted Funding for Lending Scheme.

Funding for Lending is supposed to give a boost to lending to homebuyers and businesses, by channelling billions of pounds in cheap money to lenders.

But what that means is that the lenders, in other words banks and building societies, don't have to raise so much from people like you and me trying to build up savings.

Competition has been extinguished.

This has been acknowledged by a senior Bank of England figure, Andrew Bailey (the one who used to sign our banknotes) in evidence to MPs today.

He said "What the introduction of the Funding for Lending Scheme has already shown us is that competition for deposits has eased off quite a bit actually, and that has been reflected in a change in the rate paid on deposits."

He said rates had been going up before the summer as banks competed hard to win our custom, but since then they had eased off.

Of course plenty of you have seen this effect on our High Streets and on internet websites already, and Moneyfacts has highlighted it - here as well.

More pain for savers

Banks and building societies are withdrawing special bonus rates for savers, leaving them struggling to find a decent return for their money.

Savings accounts often come with a first year bonus of around 1%, to add to the normal interest rate, to attract new customers.

But the number of easy access accounts offering bonuses has fallen from 73 to 46 since August last year. The number of notice accounts with bonus rates has more than halved: only 11 remain.

The financial information firm, Moneyfacts, blames the government's new Funding for Lending scheme, which is channelling cheap money to banks to encourage them to lend.

There's already been a drop in the underlying rates of interest on offer to savers.

Double the Cash ISA limit

The UK's biggest building society is calling on the Chancellor to allow a huge increase in the amount of tax-free cash that savers can put in Individual Savings Accounts.

There is no tax paid on the interest earned from ISA savings.

In the run-up to the Chancellor's Autumn Statement next month, Nationwide Building Society says the annual cash ISA limit should be doubled to £11,280.

Along with other building societies, Nationwide believes that a big boost to cash ISAs would allow first-time buyers to build up larger deposits - and it would help savers, especially pensioners and those close to retiring, who are worried about paltry returns on their savings.

Currently, you can save £5,640 a year in a tax-free cash ISA, but you can put aside twice that -- the full £11,280 -- in a stocks and shares ISA.

Nationwide said it is renewing it's call for equal treatment of cash savings, because many people prefer the security and flexibility of standard savings accounts to the unpredictability of stockmarket investments.

More info on Cash ISAs.

Savings rates collapsing

Savings rates have started to "collapse" as a result of a government scheme to encourage lending, according to the financial information service, Moneyfacts.

The £80bn Funding for Lending Scheme (FLS), which allows lenders to borrow from the government at cheap rates, has reduced their need to raise funds from savers.

"The immediate knock-on effect has been the collapse of savings rates across easy access, notice accounts and fixed bonds," according to Sylvia Waycott from moneyfacts.co.uk.

"And the devastation hasn't been limited to just the providers who have joined the FLS."

The highest paying instant access savings accounts for someone depositing £10,000 is down from 3.2% in August to 2.5% now, with the average rate dropping below 1%.

Moneyfacts says that the average one year fixed rate account is down half a per cent to 2.24% since August. Average interest rates for Cash ISAs and notice accounts have fallen as well.

If the Bank cuts rates...

It seems a long shot that the Bank of England would cut its base rate by 0.25% today, something the IMF suggested last month would be a helpful move. A reduction would leave the rate at a new record low of 0.25%.

But if it did, who would be affected?

Mortgage borrowers would feel the most immediate impact.

Around 2.5m households are likely to be on base rate trackers. That means their mortgage payments are tied to Bank base rate and go up or down as the rate moves.

In addition, at least a million are on a special form of Standard Variable Rate which would change. Their interest rates can't be more than 2% higher than base rate. Since they're at the maximum level already, a cut today would mean a cut in their payments.

So between 3.5m and 4m households could gain. A typical repayment mortgage of just over £110,000 would be £14.84 cheaper a month after a 0.25% reduction.

Other people on SVR would have to wait to see if they were affected, possibly not, while the large numbers on fixed rates wouldn't see any benefit.

What about savers? Their fear is that returns would dwindle even further.

Some banks would be likely to use a base rate cut as an excuse for lowering rates. However, the linkage is much less clear.

The current best savings rates of around 3% for an instant access account are kept up by desperation on the part of lenders to raise cash to lend out as mortgages.

Banks and building societies are cutting back lending because it's still tricky to raise the cash from international financial markets - savers are the only solid alternative.

In any case, those 3% accounts are only offered as a lure to bring in new deposits. The average interest rate is 0.22% for instant access savings at bank branches and 0.66% for tax-free cash ISAs.

Those paltry rates aren't likely to change much, even if the Bank tries to make money cheaper.

Zero % Interest Rates?

Would the Bank of England cut its base interest rate below 0.5%?


If it did, what would the effect be - or is the idea a red herring?


The notion has resurfaced because the IMF has called on the Bank of England to consider cutting its rate even further.


Here's the possible impact:


Borrowers


People with tracker mortgages are the winners - their monthly payments would be cut. Some borrowers on Standard Variable Rate mortgages would benefit too, if they have a guarantee that the rate won't vary too much from base rate.


New mortgage offers - unlikely to be affected much.


Credit cards, overdrafts, personal loans. All these tend to move independently from base rate.


Savers


Sounds like terrible news for people depending on savings interest.


But the best savings rates, around 3% variable, are governed more by competition between banks and building societies - as they try get hold of our cash to give them something to lend out.


So the rates on offer might be affected very little, if at all.


Stretching banks


In fact, the effect of cutting Bank base rate might be to put our beleaguered banks under even more pressure.


They'd have to cut some customers' mortgage payments, but would still have to pay top dollar - or top pound - for savings.


"Their balance sheets would be even more stretched," warns Ray Boulger, mortgage expert at John Charcol.


So...red herring?


The IMF message is bound to prompt discussion at the Bank of England. But that doesn't mean action.


If its Monetary Policy Committee can't see a useful result, they're unlikely to push base rate further down into uncharted depths.

King on suffering savers

The Governor of the Bank of England, Sir Mervyn King, has denied that he's sending out a message that it's not worth saving, despite the fact that the Bank has kept interest rates at just 0.5%.

He said he had to make "a difficult judgement about the right course of action for the economy as a whole." And added that all groups of society were suffering from the consequences of the financial crisis.

Sir Mervyn argued that a decision to raise interest rates sharply to help pensioners and others depending on their savings would backfire.

"We could put up interest rates to 4 or 5 percent and then maybe the return on savings will appear to go up," he said.

"But I'm absolutely confident that if we were do that we would see the value of assets...go down, that there would be a sharp rise in the exchange rate, that investment and consumer spending would fall. We would go back into a recession."

Sir Mervyn was presenting the Bank's latest inflation report.

Interest rates - what to expect

How are our finances going to be affected by the huge shift in interest rate expectations?

The prospect of a rise in interest rates has receded into the far distance.

Back in March, those all-seeing City economists were predicting, confidently, that the Bank of England's base rate was set to rise, with the first hike pencilled in for May.

Some even thought that the Bank's Monetary Policy committee would eschew quarter-point hikes and plump for a half-point jump to 1%.

Three of the MPC's nine members had already voted for an increase in February, they were so worried about inflation.

Come April and the predicted date for a rise was pushed back to August, then to November.

And today we hear that the MPC voted 9-0 against a rise.

More economists are suggesting that interest rates will stay where they are until 2013. That is so far ahead that it is hard to say what the situation will look like by then.

It is an intensely gloomy situation for people who rely on savings interest to prop up their incomes. Although headline savings rates are around 3% and fixed rates are higher, the average being earned from a Cash ISA is just 0.5%, uncannily close to Bank base rate.

Don't expect that to change much.

The conventional wisdom is that low rates are great news for mortgage borrowers. The large proportion of households on variable mortgage rates can breathe a sigh of relief that their payments won't be going up soon.

On the other hand, homebuyers face a tricky judgement. Should they choose a cheap variable (or tracker) rate, on the grounds that a rate rise could be a long way off?

Or should they choose the security of a fixed rate, knowing that for a period of 5 years, say, their payments will not change? Given the outlook for rates in general, new fixed rates could be forced down.

There is no easy answer. As you have seen, forecasts of future interest rates can shift wildly from month to month.

Savers desperate for rate rise

A group of campaigners working on behalf of savers has called on the Bank of England's Monetary Policy Committee to raise interest rates to help pensioners and encourage saving.

Save Our Savers says a country without savings is a country without a future.

And it warns that those on fixed incomes, such as pensioners, are suffering terribly from the combination of extremely low interest rates and above target inflation.

The group has written to all nine members of the Monetary Policy Committee, who are expected to leave the Bank's base rate at its historic low of 0.5% after meeting today and tomorrow.

The letter complains that the real value of the nation's cash savings has fallen by £50 billion over the last 12 months as a result of high inflation and low rates.

Who is the Junior ISA for?

The government is suggesting that 6 million children will be able to get the new tax-free Junior ISA from the launch expected at the beginning of November, then an extra 800,000 babies will "benefit" each year.

But will they really? It's a great idea to save for the children, particularly with all the worries about paying for university. Hence this replacement for Labour's Child Trust Fund.

However, there are several reasons why take-up could be disappointing.

*Families are struggling to find money to save.

*There is no taxpayer contribution to kick-start the plans.

*The money will still be locked in. Parents won't be able to get it back if they need it.

The first two points are fairly obvious. Whatever you think about the taxpayer stumping up hundreds of pounds for each Child Trust Fund, it did encourage parents to engage with the idea.

Around one in five families added their own contributions. It might be optimistic to think that the same proportion will be tempted by the Junior ISA.

The last point, though, could be very significant. Parents are unlikely to identify any major difference between the Junior ISA and other forms of saving which are open to them, except that they are waving goodbye to their money forever.

Remember that only a third of Britons save regularly, according to the Halifax. And just under a third have no savings at all to fall back on or less than £249 set aside as a financial safety net.

So you are already talking about a minority who might be tempted by the Junior ISA.

Now consider what parents might be doing with their money, after meeting mortgage and other debt repayments and settling the monthly bills.

First up might be pension contributions. We don't want to be a burden on the young later on, do we?

Then there are straightforward ISAs, the parents' own Individual Savings Accounts. Cash ISAs for the short term and, possibly, share ISAs for the longer term.

Parents can keep savings in their own Cash ISAs, up to £5,340 each year for each adult (from 6th April), accumulating year after year. And, crucially, they can take the money out if they need it. Or they can spend it on the kids.

So the Junior ISA may only be attractive once a couple is putting aside more than their joint annual entitlement of £21,360 in their own ISAs -- and that's on top of any pension contributions.

Which feels like a small proportion of the population.

It's true that some parents really do value the fact that the money is locked-in and will be safe for the children. But many could steer clear of Junior ISAs.

What will we get out of banking reform?

Sir John Vickers laid out his stall today. He has been given the task of recommending how to reform the banking system, after its "rickety structure", as he called it, was revealed during the financial crisis.

But how well will customers do out of this?

Britain's savers are helping to rescue our banks, albeit unwillingly. By putting up with paltry interest rates, they are sacrificing a decent income from their savings in order to allow the banks to sit on more cash and rebuild their balance sheets.

And Britain's current account users are unwittingly subsidising the banking system as well. The lack of competition between our few major High Street banks means that bankers can get away with high charges for overdrafts and other services.

These considerations have been set aside for the moment. Priority is being given to making sure "the system is properly resilient in the future", as Sir John Vickers explained today.

Plainly it is in the interest of customers to make sure that we don't have another banking crisis. However, Sir John's Independent Commission on Banking has also been charged with finding ways to increase competition.

He said today that he was "squarely focused" on that objective. But his focus in this speech was on shoring up the banks and protecting their retail operations in future.

By the time he comes to look at the service and returns we are all getting on our individual accounts, can we expect that much will be done? We have to hope that these niggling points aren't relegated to the afterthought section of his recommendations.

After all, the survival of our banks is a question of life and death, while competition is merely a question of their profits or ours.