For savers, times are bleak. The very best easy-access accounts pay around 1.5pc, and to get a fixed-bond rate over 3pc requires committing cash for five years. In January, Moneyfacts recorded 139 rate cuts to 21 rises, and in February so far there have been 169 rate cuts to just 11 rate rises. With the property market booming and the Bank Rate remaining at a record low, the UK is now a borrower’s market. Rachel Springall of Moneyfacts said: “The impact of lending initiatives introduced by the Government in recent years, such as Funding for Lending, means that there is a general lack of competition in the market for cash.
“It’s a gamble to know when rates will eventually start to rise but the general consensus is that savers should prepare for low returns in cash investments for some time to come.” One indicator that things are set to get worse before they get better is the decline in wholesale interest rates (swap rates), at which banks lend to each other.
Essentially banks use swap loans to balance their mortgage book against their obligations to savers. As they get more confident and lend at lower rates, they are unable or have no need to offer high savings rates.
High-interest current accounts and regular savers: For those who want to steer clear of taking risk, high-interest current accounts and regular savers currently pay rates of 5pc or more. However as Susan Hannums of Savings Champion explained: “In today’s market you may need to jump through some hoops to access the very best rates.”
Nationwide’s Flexdirect account pays 5pc on balances of up to £2,500 for 12 months, as long as £1,000 a month is paid into the account. It also provides access to a linked regular saver, paying 5pc and allowing deposits of up to £500 per month. For those with higher balances (around £8,000 or more) Santander’s 123 account remains a good option despite the £5 monthly fee. It pays 3pc on balances between £3,000 and £20,000 as long as £500 is paid in monthly and there are two active direct debits. The account also pays up to 3pc cashback on household bills, enabling customers to leverage a greater return.
Fixed-rate bonds: Longer-term fixed-rate bonds are another option, with the best five-year offerings paying around 3pc. Savers might be reluctant to lock in now and miss out on potential future rate rises, but should consider that guaranteed returns over the long term should form at least part of a savings portfolio. Ms Hannums said: “Savers with larger balances may be wise to split money between high interest-paying current accounts, fixed-rate bonds and accessible accounts that can take advantage of future changes in rates.”
Peer-to-peer lending: Andrew Hagger, of MoneyComms, advises steering clear of stocks and shares “unless you intend to invest for the long term”, instead suggesting peer-to-peer lending (P2P) as an option to consider. Mr Hagger said: “P2P sits between cash savings and stock-market investing. It’s not 100pc safe as cash is, but is not as volatile as stock markets, and potential returns are attractive. “The main players in the market offer returns of between 3pc and 6pc on the back of loans provided to personal customers and small businesses. “You may find examples of 9pc-plus rates from some providers – but be wary, as a higher rate is an indication that the loans made by such providers are higher risk.”
Additionally Innovative Finance Isas are to be launched in April – delays permitting – which will be providing a tax-free wrapper for P2P investment. P2P investments are not covered by the Financial Services Compensation Scheme, unlike bank deposits and fund investments, so it is unknown how much money would be recovered if a platform failed. Some providers, such as Ratesetter and Zopa, offer contingency funds to cover losses in case some borrowers fail to repay. These by no means cover all outstanding loans, with the average default rate being used to calculate the size of coverage. It has yet to be seen how well peer-to-peer lenders fare in the long term, and it would be wise to commit only a fraction of savings.
Isas: Cash Isas remain an option to consider too, although not for the immediate benefits. Rates-wise, especially with the introduction of the personal savings allowance, they can’t compete. However, they do provide long-term tax protection which could be useful down the road if the money is switched to equities, enabling a portfolio to grow free of capital gains tax or be used to generate a tax-free income.
(the Telegraph.co.uk, 2016)