2013: The worst ever year for savers

The Bank of England has once again held the base rate at its lowest ever level of 0.5%, but this is just the start of what is likely to be another terrible year for savers.

The tough deal of low rates and high inflation, suffered by savers for nearly four years, is set to continue and a culmination of factors could mean worse is yet to come.

The base rate has already resulted in poor rates for savers: Today there are just four ISAs on the market that beat inflation, according to savingschampion.co.uk. But since the end of last year this has been compounded by the Government’s Funding for Lending Scheme (FLS).

The initiative has proved disastrous for savers, pushing low rates to rock bottom levels and will continue to run during 2013. The scheme gives banks and lenders access to cheap money on the proviso that it’s passed on to customers, but means that savers’ cash is of less importance to the banks signed up.

The scheme hasn’t just damaged savings account rates. Savings account bonuses, which temporarily boost headline rates of interest, have been disappearing from the market since August when FLS was launched.  

In a double whammy, the rates on the bonuses that remain are falling fast, according to analysis by moneyfacts.co.uk.  Sylvia Waycot, financial expert at moneyfacts.co.uk, said: “We now have less choice than we had four months ago, the rates are very much poorer and, to add insult to injury, the introductory bonus has all but disappeared as banks shy away from attracting the attention of desperate savers.

“Worryingly, today out of 416 easy-access accounts only 46 have a bonus and notice accounts are worse still with only 11 offering a bonus out of 212.”

Funding for Lending is set to ensure that ISA season this year is also a disappointment. Susan Hannums, director at savingschampion.co.uk, said: “Traditionally this is when savers can find some of the best ISA rates on the market as providers battle it out to offer the best rates. 

“However, the Funding for Lending Scheme continues to influence providers’ need to raise money from savings deposits and, unless anything changes between now and March, providers are unlikely to show a desire to offer top rates to pull in new money.”

And as savers’ money become less important, providers have increasingly started slashing variable rates. “Already well known providers such as M&S and Intelligent Finance have announced planned rate reductions for existing customers, in the early part of 2013,” Hannums said.

Meanwhile, with inflation is running at 2.7%, according to the most recent Consumer Prices Index (CPI), it’s already difficult to get a savings account where the value of your money rises faster than prices. But there are fears that rising household bills, such as energy and food, could push inflation even higher over the course of the year.

What can you do?

You should try and ensure you have about three months’ worth of income stashed in an easy-access account for emergencies. Keep an eye on rates and move your money if the rate drops or another account offers a better deal.

Savingschampion.co.uk offers a free Rate Tracker service that lets those signed-up know when rates change on their savings accounts, whether that’s a result of the bonus or fixed-rate period ending or because the underlying rate is altered.

Once you have your rainy day fund sorted, look at other places where your money will work harder for you.

Look past the big name providers

Providers that aren’t signed up to the Government’s FLS are more likely to fight for savers’ cash by offering the most tempting rates. This means some providers, which you may not have previously heard of, look set to offer the best deals. Keep an eye on these lesser-known providers, including Shawbrook Bank, FirstSave and the Bank of Baroda.

As long as a provider is authorised by the Financial Services Authority (FSA), up to £85,000 of your savings are protected per provider thanks to the Financial Services Compensation Scheme (FSCS). You can use the FSA register to check whether a provider is authorised.  Beware that a couple of brands count as the same provider.

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Peer-to-peer

As saving rates have bombed, peer-to-peer lending sites have become more popular. When Rate Setter is currently offering a return of 3.1% on money invested for a year and the top one-year fixed-rate bond is just 2.3%, it’s easy to see why. 

The important to thing to remember is that money siphoned through peer-to-peer providers is not protected by the FSCS.

[Related feature: Are social lenders a better option than banks?]

Overpay the mortgage

While money will earn next to nothing in savings accounts, it could be better to use surplus cash to pay off debts, such as your mortgage. The money you save in interest is likely to surpass the interest generated in a savings account.

If you want to keep on saving, an offset mortgage allows you the best of both worlds. While held in a separate savings pot, your money also cancels out part of your mortgage balance so that you pay less interest on your overall debt. Unlike overpaying the mortgage, you can still access your savings if you need to.

So what you’re effectively doing is earning interest on your savings – tax free – at the same rate as your mortgage. The interest rates on these home loans does tend to be a little higher than best-buy mortgages, however, so they are generally better suited to those with a relatively large stash of money to make the offset worthwhile.

Take more risk

More savers are turning to investments in order to reap returns. And as the stock market has consistently beat cash returns in the past, it could be a good option for your money.

The two main ways of doing this are either picking shares with a strong history of providing dividends   (equivalent to “interest” payments on savings) or investing in a fund where someone picks the shares most likely to provide income and invests on your behalf. So-called “income investing” does not offer the chances of huge gains, but is a lot more likely to provide a consistent return.

Before putting any money into an investment, you must understand that you are taking a risk with your money. When you put cash in a savings account, the original sum is guaranteed, whereas when you invest it is not.

It also is worth pointing out that, unlike a savings account, you are charged for trading in shares – so this must be taken account of when looking at potential returns – and returns not guaranteed.

Some investments are riskier than others and if you are new to investing, you should seek independent advice to set up a portfolio that is suited to our needs and appetite for risk.

Always follow the golden rule: Never put your money in an investment that you don’t understand.

Don’t forget you can use more of your ISA limit (£11,280 in the current tax year) to keep returns safe from the tax man.