Sensible savers with bonds maturing this year face a massive interest rate shock.
Savers with fixed rate accounts ending this year are set to lose a total of £1 billion when reinvesting the money.
This is because interest rates have fallen dramatically – up to 2.47% on some account terms - research from HSBC shows.
Those looking to reinvest will face falls in income of 52% for three-year bonds, 50% for five-year bonds and 45% for two-year bonds.
Loss of income
This year around 5.3 million savings accounts will come to an end, 2.8 million of which have already closed.
If savers put their money back into similar long-term fixed rate accounts they will face a massive fall in the interest rates on offer.
People who have already seen their savings accounts end this year will have seen average losses of £1,570, £970 and £814 on three, four and two-year accounts respectively.
The table below shows the full range of losses for the first half of the year.
|
Fixed rate bond |
Average investment |
Average return |
Change in potential income |
|
Six months |
£34,994 |
£229 |
-£28 |
|
One year |
£16,670 |
£478 |
-£184 |
|
18 months |
£26,619 |
£1,217 |
-£463 |
|
Two years |
£23,126 |
£1,789 |
-£814 |
|
Three years |
£22,257 |
£3,027 |
-£1,570 |
|
Four years |
£21,977 |
£2,958 |
-£970 |
|
Five years |
£2,014 |
£497 |
-£249 |
Falling interest rates
There are many reasons for the dismal savings market. One of the main culprits is the Government’s Funding for Lending Scheme (FLS). Although this has helped borrowers who want to get onto the property ladder, thanks to falling mortgage rates, it’s had a significant detrimental effect on savings accounts.
Providers are now able to access cheap money from the Government and therefore have less need for savers’ deposits.
As you can see from the table below, interest rates have fallen significantly over the last six months, and there aren’t any current indications of this trend reversing in the short term.
|
Fixed rate bond |
Average change in interest of best buy accounts |
|
Six months |
-0.16% |
|
One year |
-1.11% |
|
18 months |
-1.16% |
|
Two years |
-1.76% |
|
Three years |
-2.35% |
|
Four years |
-1.10% |
|
Five years |
-2.47% |
The top savings accounts
Rates are dire at the moment and currently there are no savings accounts or cash ISAs which negate the effects of inflation.
When it comes to instant-access accounts the best you can hope for is 1.50% from the AA's Internet Extra (minimum deposit of £1,000), while for a one-year fixed bond you cannot get a rate better than the 2.05% on offer from Kent Reliance BS (minimum deposit of £1,000).
The highest rates around come in the longer-term bonds, such as 3.50% available with the Skipton seven-year limited edition fixed-rate branch bond or the 2.90% which comes with the five-year fixed-rate bond from FirstSave.
But as interest rates will improve at some point, if you open up a long-term account, remember that you’re stuck on the rate until the account matures. During this time, as rates (presumably) rise you’ll be locked into an account on a lower rate and unable to benefit from new accounts opening offering higher returns.
Peer-to-peer lending
With rising inflation and low interest rates, there is little incentive to put cash into savings accounts.
Instead of waiting until the situation improves, one alternative is peer-to-peer lending which effectively cuts out the middle man allowing individuals to lend to each other.
This is a great way for savers to earn a healthy income as the average returns are around 5% - far above that from any current savings accounts.
These products are not yet included in the Financial Services Compensation Scheme (FSCS).
However, protection is being introduced next year and many sites, such as RateSetter, have provision funds to cover any shortfalls.
Investments
This year the allowance for an ISA is £11,520, which can be invested tax-free. This entire lot can be put in a stocks and shares ISA or you can put up to half in a Cash ISA.
The stock market is risky but having a diversified portfolio reduces the risk and is likely to produce better returns then you would get in a savings account.
However, to get a decent return you need to be invested for at least five years, so this is more of a longer-term option.
You can read more in our guide How to make money from the stock market.
Current accounts
Another option is using your current account to earn some interest.
Several providers have started offering in-credit interest which is higher than the average savings account and instant access.
The Santander 123 account, for example, pays tiered rates of interest including 3% on balances of between £3,000 and £20,000. For savers with less money, Nationwide will pay 5% on balances up to £2,500 with its FlexDirect account.
Our article The best bank accounts for cashback has more details.