Why savers should beware of variable savings rates

Savings interest rates are being slashed. Research from website Savingschampion.co.uk found that 100 variable rate savings accounts have had their rates reduced this January, compared to just 11 in January 2012. That's a staggering increase.

When you’re looking for a savings account or Cash ISA, the interest rate on offer is likely to be one of the biggest factors influencing your decision. Variable rates, as you might expect, can go up or down at the provider’s discretion. In the past the possibility they might go down probably wasn't much of a concern for most people as they rarely did. But things have changed.

The Bank of England’s Funding For Lending scheme has received the lion's share of the blame for these falls. As the Bank of England is lending money to institutions at cheap rates, they no longer need such high levels of deposits.

As a result, some accounts have had their interest rates cut by as much as 1%.



Some examples

For example, the rate on Sainsbury’s Bank’s Extra Saver has fallen from 2.3% in October to 1.5% today. And Shepshed Building Society’s (now-closed) Postal Account, once a market leader, has dropped its interest rate from 2.5% to 2% in the space of a few months.

The interest rate on Marks & Spencer's Everyday Savings account has already fallen from 2.35% to 1.35%. Now, M&S has announced that it will fall to a pitiful 0.35% from 12th April.

And here’s a Cash ISA example. Marks & Spencer’s Advantage Cash ISA was paying 3% at the beginning of December, before that rate was cut to 2.75%. It was then withdrawn from the market in January and the interest rate was cut again to 2.25%.



The danger with variable rates

The obvious disadvantage of variable rate savings accounts and ISAs is rates can go down in response to wider economic events. Of course, they can also go up, for example when the Bank of England base rate is rising.

The other problem is keeping on top of what’s happening with interest rates, particularly when a product has been closed to new business and it’s not appearing in the best buy tables in the papers or online anymore.

It can be easy to let your savings sit idly in an account where the interest rate is consistently falling, simply because you’re not regularly monitoring it.

If you do opt for a variable rate account, you should make sure you keep tabs on it, either online or over the phone. And don’t be shy about switching your money somewhere else where it’s going to earn more interest.

Judging by the figures, doing those last two things is now more important than ever.



Should you fix it?

With rates tumbling, if you're looking for a savings account you might be tempted by the relative security of a fixed-rate bond, rather than an instant access account. Let's see how they compare right now.

Top instant access accounts with a bonus

Account

Interest Rate (AER)

Minimum Deposit

Withdrawal limits

Bonus

Post Office Instant Saver

2.10%

£500

None

Rate includes a 2.00% bonus for the first 12 months

Coventry Building Society Online Saver

2.00%

£1

Four penalty-free withdrawals a year

Rate includes 0.40% bonus for the first 12 months

Derbyshire BS Derbyshire NetSaver Issue 10

2.00%

£1,000

None

Rate includes a 1.50% bonus fixed for the first 12 months

Nationwide MySave Online Plus

2.00%

£1,000

One penalty-free withdrawal a year

Rate includes a 1.18% bonus fixed for the first 12 months

Top instant access accounts without a bonus

Account

Interest Rate (AER)

Minimum Deposit

Withdrawal limits

West Brom WeBSave Plus 3

2.30%

£1,000

One penalty-free withdrawal a year

West Brom BS Easy Access Branch Saver Issue 3 (can only be opened in branch)

2.26%

£1,000

Two penalty-free withdrawals a year

National Counties Branch Saver (can only be opened in branch)

2.11%

£500

None

Top one-year fixed-rate bonds

Account

Interest rate (AER)

Minimum deposit

Virgin Money Fixed Rate E-Bond

2.25%

£1

United Bank UK One-Year Fixed Deposit

2.25%

£2,000

Vanquis Bank High Yield Fixed Rate Bond

2.21%

£1,000

You’ll get a slightly better return on your money from the top one-year bonds than you would via an instant access account with a bonus, but if you go for West Brom's instant access account without a bonus you'll earn more.

The West Brom account looks tempting, and the one withdrawal gives you a bit of flexibility. However, with the Post Office's Instant Saver you can withdraw as much as you want and you're guaranteed a minimum of 2% interest via the fixed bonus if you keep the account open for at least a year.

It's potentially a much easier decision to make with a Cash ISA, as the top-paying instant access and short-term notice accounts trump the fixed rates.

Or if you want a higher rate with a certain degree of risk, you could look at peer-to-peer savings, where you lend your money to either individual borrowers or businesses.

Ultimately, it comes down to how much you want to manage your money and a degree of guesswork. But if you're unhappy with your interest rate and you can switch, then do it now.



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