With uncertain markets increasing, the risk in equity investment, and Bank of England policy likely to keep interest rates low for some time to come, it has rarely been more important to know where to put your savings.
Campaigners have been pressing banks to be clearer about the interest rates they are offering customers, with the consumer watchdog Which publishing research on 27 October claiming savers were missing out on as much as £322 each a year.
A review of the approximately 1,200 savings accounts available in the UK showed almost 50 per cent were paying 0.5 per cent interest or less.
Head of savings research at Fair Investment, Julie Smith, said: “Cash is still important, most investors will be looking at having at least some proportion of their investments in cash to counter act the volatility – but it’s important not to get sucked into the headline rate.”
One of the major reasons why customers might find themselves receiving minimal interest is the offer of bonus rates when an account is opened, only for the rate to expire after six months or a year.
Instant access savings and cash Individual Savings Accounts (ISAs) often include 12 month bonus rates. The Post Office Online Saver pays a 2.9 per cent interest rate, but this includes a 1.25 per cent 12 month bonus. Once the bonus has expired, at the current rate the account would be paying just 1.75 per cent interest (before tax).
This would still make the Post Office Online Saver a better paying instant access savings account than some on the market.
For example, the Lloyds TSB Easy Saver offers customers a 1.50 per cent 12 month bonus making the overall annual rate 1.60 per cent.
After 12 months, at the currently advertised rates, the account will pay just 0.10 per cent gross annual interest. Once you deduct the lower rate of tax, annual interest is just 0.08 per cent.
The Barclays Golden ISA offers an attractive variable rate of 2.08 per cent, but this includes a fixed one per cent bonus for 12 months.
Julie Smith discusses bonus rates in more detail here.
How do you know if your rate has changed?
Industry guidance for banks and building societies on complying with Financial Services Authority (FSA) rules sets out the circumstances for an organisation to notify savers about a change in the interest rate an account pays if it is classified as a ‘non-payment’ account, normally fixed rate accounts or ISAs.
This guidance applies to single falls of over 0.25 per cent in the interest rate or over 0.50 per cent in a 12 month period, but only for savers with over £500 deposited.
The Which campaign is calling for organisations to print interest rates clearly on statements to allow people to see what rate of return they are receiving.
While some organisations have made commitments to include interest rate figures in statements, this is not an industry-wide practice by any means.
Lloyds Banking Group took the opportunity to highlight the steps it has taken to improve transparency for savers.
It said its Lloyds TSB and Halifax businesses ensure interest rate information is clearly visible on online and paper statements, and provide an online calculator service to help customers work out the interest they can earn with an account.
If you’ve checked the rate you’re getting for your savings and think you’re being short-changed probably the most power a consumer has is to take their business elsewhere.
There are plenty of options when it comes to savings, despite the consistently low Bank Rate of 0.5 per cent putting downward pressure on the return banks and building societies offer.
Fixed rate bonds provide a consistent interest rate. There are accounts available at the moment offering from 2.60 per cent up to four per cent annual interest depending on how much you have to invest and how long you wish to lock your money away for.
The instant access market includes accounts paying those rate boosting bonuses for limited periods, or a consistent rate, but these rates are variable and accounts may be internet accessible only.
Cash ISAs generally pay variable rates, with bonuses also a feature of this market. Some ISAs may offer a fixed headline rate for a set period or tiered rates depending on how much is deposited.
In pursuit of better returns, and a willingness to be exposed to the volatility of the markets, investment ISAs (also known as stocks and shares ISAs) can provide a range of options.
With investments made by fund managers, charges may apply when investing savings in this type of ISA, which are designed as medium to long term investment options. The value of investments and income from an investment ISA can fall as well as rise and you may not get back the full amount invested.
© Fair Investment Company Ltd