Is The Party Over For Savers?

Savings rates look set to fall so make sure you're getting the best deals....

After an extraordinary period in the financial markets, savers have all but given up on chasing the best rates and focused their attentions on safeguarding their cash instead.

But amid speculation that rates are about to fall, you can't afford to neglect rates altogether.

Over the past few months, savings rates have remained uncharacteristically high -- despite the turmoil in the markets -- thanks to the intense competition for retail deposits.

However, the government's recent bailout of the banking sector, and the half a point cut in the Bank of England's base rate to 4.5% mean that savings rates may not escape unscathed much longer. If the bailout package succeeds, it will raise confidence in the banking system which should promote more interbank trading. As a result, banks won't be so desperate to raise funds from ordinary savers and savings rates could fall.

And, given that we are likely to see rates returning to similar levels as those being offered when base rate was last at 4.5 per cent, the message is to grab a deal now before the savings-rate bonanza comes to an end, especially with the latest figures showing inflation running at 5.2 per cent -- making it even more of a struggle to earn a positive real rate of return on your savings.

Fixed-Rates Are Falling

The half-point cut announced by the Bank of England last week has taken a heavy toll on fixed-rate savings bonds, with a growing band of providers withdrawing their products and launching new ones paying reduced rates.

The Halifax, for example, has scrapped the best deals under its AA, Saga and Birmingham Midshires brands including the AA's market-leading one year-bond at 7.21 per cent and the Birmingham Midshires one-year bond at 7.05 per cent.

With a dwindling number of providers still offering rates above 7 per cent, if you want to lock in , you need to act fast, as these rates aren't likely to be around for long.

Indian-owned ICICI Bank currently has a one-year bond at 7.2 per cent, while Anglo Irish has a one-year bond at 7.05 per cent, with the latter offering the additional security of the Irish Government's pledge to guarantee unlimited deposits in each of the six largest Irish banks.

Elsewhere, the top-paying UK provider in the one-year bond arena is Birmingham Midshires with a rate of 6.85 per cent.

Easy Access Accounts Are Yet To Fall

As yet, there have not been any major cuts in the rates on easy access accounts, and the speculation is that it may take another base rate cut before this happens.

As a result, the best easy access rates are now hovering around 2 percentage points above base rate with West Bromwich Building Society paying 6.56 per cent on a minimum of £1,000 and Egg offering 6.55%. 

Other leading accounts include Scarborough Building Society which pays 6.51% on £1, while Bradford & Bingley, whose savings deposits now belong to Spanish bank Santander, owner of Abbey, is also paying 6.51% on £1.

Government-Backed Accounts

In the wake of the collapse of Icelandic  banks Kaupthing and Landsbanki, many savers have rushed to move their money to safer havens closer to home. Popular choices include Government-backed National Savings & Investments (NS&I) and Northern Rock, both of which offer 100 per cent security.

However, nationally-owned Northern Rock has recently withdrawn some of its most competitive deals while NS&I trimmed the rates on some of its deals both before and after the rate cut.

The End Of The Rate Tart?

The debacle over the deposits in Icelandic bank accounts has also provoked wider concerns over the safety of foreign-owned accounts, and prompted many savers to pull money out of these accounts altogether.

This has led to mounting speculation that we could see an end to the era of the rate tart as savers stop trusting foreign banks and see the rates paid by UK banks reduced by more than base rate.

And, on top of this, the consolidation that is going on in banking circles here means there is less competition for savers' custom, which could lead to less attractive rates all around.

As a saver, it's crucial right now that you strike a balance between security and reasonable rates; after all, you shouldn't have to sacrifice competitive products altogether just to ensure you can get a good night's sleep. Take a look at Cliff D'Arcy's article, Big Banks For Safe Savings, for more on the safest accounts available.