Want better savings rates? Ditch the Big Six banks

Last week, I asked savings expert Anna Bowes if she could come up with five tips to ensure savers don’t fall victim to paltry savings rates of 0.01 per cent or below. She went one better and offered six. ‘Don’t leave your cash with Barclays, NatWest, Lloyds, HSBC, Halifax or Santander,’ she said. 

I laughed out loud although Bowes, co-founder of rate scrutineer Savings Champion, was making a serious point. If you have hard earned money sitting in an easy-access account with any of these six major high street banks, you are more than likely to be earning no more than 0.01 per cent in annual interest. Run for the hills, I say. 

To put that rate into pounds and pence, squirrel away £50,000 in an Easy Saver account with Lloyds or a Flexible Saver account with HSBC and you will earn the grand sum of £5 in annual interest. An amount just sufficient to go on Amazon and buy your loved one a personalised ‘happy birthday’ 110gram bar of milk chocolate. I’m not sure how the prezzie will be received (badly, probably) but that’s a discussion for another day. 

Scrooged: The big High Street banks will only pay you enough interest to buy this £5 chocolate bar if you save £50,000 a year

Scrooged: The big High Street banks will only pay you enough interest to buy this £5 chocolate bar if you save £50,000 a year

Scrooged: The big High Street banks will only pay you enough interest to buy this £5 chocolate bar if you save £50,000 a year

The same goes for NatWest Instant Saver and ‘everyday’ accounts offered by Barclays, Halifax and Santander. Five pounds of annual interest on £50,000 saved: £8.50 on £85,000 – the limit above which savers lose the comfort blanket provided by the Financial Services Compensation Scheme. Scrooge-like. Six banks, six Ebenezer Scrooges (before he saw the error of his ways). 

A modern-day savings scandal? In my eyes, yes. Especially as it was announced this week that inflation had shot up from 0.6 per cent to 1.0 per cent. 

Although the Bank of England base rate sits at a record low of 0.1 per cent – and appears to be heading only in one direction (downwards) – it doesn’t take a mathematician to work out that this is ten times the rate that the big banks are prepared to pay millions of their customers, most of whom have a sense of misguided loyalty to their bank (‘I bank with them so I should have my savings with them’ – garbage).

‘Don’t assume your bank is paying a fair rate,’ Bowes told me rather politely when discussing the broken savings market. I’d put it more bluntly: ‘Assume your bank is NOT paying you a fair deal.’ 

A few days ago, number crunchers at Moneyfacts spelt out the parlous state of our savings market. It said that average savings rates had fallen for a fifth month running. 

In March , before lockdown sent the economy into a tailspin, the average rate available on an easy access account was 0.56 per cent. Last month, it was 0.24 per cent and this month 0.22 per cent. Below 0.2 per cent by the end of the year? I wouldn’t bet against it. For savers, it is the equivalent of death by a thousand cuts. Or as Moneyfact’s Rachel Springall puts it, Covid-19 and cuts to the base rate have triggered a ‘rate-cutting trend’ among savings providers. ‘While this is expected to slow down,’ she argues, ‘there are few signs of the market making a U-turn any time soon.’ 

Sadly, the base rate will not be going up in the meantime. Banks, rightly concerned about a forthcoming tide of bad debts (both consumer and business based) heading their way, are keen to keep as wide a gap between the cost of their borrowings (our savings money) and the interest they charge on mortgages and personal loan rates. That will result in suppressed savings rates. 

Also, the Government is understandably keen to get the country spending again, rather than hoarding. So, there is no political will to encourage a better deal for savers. 

This all means that poor savings rates are here to stay – and probably for a lot longer than most people imagine. According to James Daley, managing director of campaigning website Fairer Finance, ‘savers should probably strap themselves in for at least another decade of poor returns’. Perish the thought. 

So, what options – if any – are available to savers keen to secure a better return on their cash? Here are five super tips – on top of the six already mentioned by Bowes.

Use the Government’s own savings arm

National Savings & Investments, the Government’s savings bank, has been alone in striving to give savers a fair deal. 

In April, in response to the pandemic, it suspended rate cuts announced in February that were scheduled to be implemented in May. 

Then, in July, the Treasury announced a massive increase in the amount of money it wanted NS&I to raise from the public – from £6 billion in the year to April 2021 to a whopping £35billion. That meant the savings organisation could continue to offer some of the best savings rates in the country, rather than being forced to choke off demand by reducing rates. 

The result is that NS&I is offering two easy access products – Income Bonds and Direct Saver – that are paying annual interest of 1.15 per cent and 1 per cent respectively. ‘The best easy access rates available anywhere,’ says Bowes. In other words, grab them while stocks last. The difference these accounts could make to your savings income should not be scoffed at. On a £50,000 deposit, you will earn annual interest of £575 from Income Bonds and £500 in Direct Saver. Given a choice between £5 and £500 of savings income a year, or between £5 and £575, I know what I would opt for every time. 

Direct Saver can be managed online or by phone with deposits accepted from £1 up to £2million, and interest paid in April. The minimum deposit in Income Bonds is £500 and the maximum £1 million. Interest is paid monthly and the account can be run online, by post or phone. Interest for both is paid without tax being deducted and savers can mitigate any tax by using their annual personal savings allowance of £1,000 (basic rate taxpayers) or £500 (40 per cent taxpayers). 

Premium Bonds are also worth considering, with monthly tax-free prizes ranging from £25 to £1million. The prize rate is equivalent to an interest rate of 1.4 per cent and bonds can be bought online, over the phone or by post. The minimum purchase is £25 and the maximum holding is £50,000. 

Says Bowes: ‘Although there is always the possibility of not winning any prizes, you never know just how much you could win.’ For the record, I’ve been buying £100 of Premium Bonds every month for nearly two years, making additional purchases whenever I have felt flush. So far, I’ve won £25 on £2,600 deposited. Granted, it’s not life changing, but a better result than if I had put the same amount in a Lloyds Easy Saver account and allowed it to fester. Bowes tells me that her partner Tim won £5,000 five years ago, and another £575 last month, albeit with a much bigger holding than mine. My middle son, Mark, also swears blind by them, winning a prize more months than he doesn’t. 

Bond holders can download the Premium Bonds ‘Prize Checker’ app, which allows them to check every month if they are a winner. 

One word of warning. The interest rates on Income Bonds and Direct Saver are variable – and are likely to come down at some stage. As is the effective interest rate on Premium Bonds. So, enjoy the rates while you can.

Put savings into a fixed-rate bond

Though rates on new fixed-rate bonds have come down sharply since March, savers can still lock into rates above 1 per cent. 

For example, a one-year bond from Charter Savings Bank will pay interest of 1.22 per cent on maturity. Its two- and three-year bonds pay 1.31 and 1.33 per cent respectively. The minimum deposit is £5,000 and all money is protected under the Financial Services Compensation Scheme. 

To put these figures in perspective, Moneyfacts says the average one-year fixed-rate bond currently pays 0.63 per cent, compared with 1.15 per cent in March. 

Says Bowes: ‘Locking some of your cash away in such a bond will mean that at least some of your money will not see a rate cut until the end of the fixed term.’ Reassuring. 

Those with maturing NS&I guaranteed income bonds or guaranteed growth bonds would be wise to roll them into follow-on bonds offered by the savings organisation. New rates for one- and five-year guaranteed growth bonds are 1.1 per cent and 1.65 per cent respectively. For the guaranteed income bonds, the respective rates are 1.05 per cent and 1.6 per cent. These ‘roll-over’ bonds are not available to new customers.

Make squirrelling away cash a habit 

Regular savings accounts offer higher rates than most other types of savings account. But there are limits on the amount that can be saved each month. 

The best deals are available to current account customers of First Direct, HSBC and M&S Bank who can all earn 2.75 per cent interest on 12-month term accounts. The maximum monthly saving is £250 for M&S and HSBC – £300 for First Direct. 

Coventry’s Regular Saver (2) is available to non-customers of the building society. Although its rate is less generous at 1.85 per cent, the maximum monthly deposit is higher at £500. The account can be opened online, by post or phone. 

One word of warning. Coventry’s rate is not fixed – unlike the others – so there is nothing to stop the building society reducing it at the drop of a hat. 

Think about taking out a lifetime Isa 

For those with an eye on buying their first home or committed to long-term saving (and I do mean committed), a Lifetime Isa is an option, primarily because of the 25 per cent incentive provided by the Government. 

This means that if the annual maximum of £4,000 is saved, this is boosted by a Government contribution of £1,000. Anyone aged from 18 to 39 is eligible for a Lifetime Isa – but penalty-free withdrawals are only permitted to either purchase a first home or after age 60. Any other withdrawals are subject to a 20 per cent penalty (25 per cent from next April). A bonus is paid on any contribution up to age 50. 

Providers include Moneybox, Paragon and building societies Newcastle, Nottingham and Skipton – with interest rates from 0.35 per cent (Newcastle and Skipton) to 1.1 per cent (Moneybox). 

Arm yourself with more information

Rate scrutineers such as Savings Champion and Moneyfacts offer information online on best savings deals and free weekly emails on best buys and new savings offers. 

Money apps such as MoneyDashboard allow savers to see details of all their accounts in one place, making their management easier. 

Good luck. 


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THIS IS MONEY’S FIVE OF THE BEST SAVINGS DEALS

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