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What are the choices for desperate savers?
4:13pm Tuesday 12th June 2012 in Business: Personal Finance
AS the speculation about the future of the entire eurozone intensifies in the countdown to the next election in Greece, a subtle change of mood could be taking place among savers.
Many walk a fine line: do they keep moving money around in search of higher income from cash, shares or bonds, or focus instead on wealth preservation, simply trying to maintain the value of what they already hold?
For a couple of years, the general view has been that interest rates must go one way – upwards, eventually.
Now International Monetary Fund boss Christine Lagarde suggests the Bank of England may need to send interest rates even below the current historic 0.5 per cent low to kick-start the economy.
If the latest prediction that interest rates cannot be allowed to rise for five years proves accurate, many older people will lose the extra income which they reasonably expected from years of patient saving.
Colin Jackson, director at Baronworth Investment Services, says: ‘‘How much lower can interest rates realistically go, below the current level which has broken records established over more than three centuries?’’ If mayhem on the financial markets does follow a Greek exit from the eurozone, there is only one place where all your money is 100 per cent guaranteed by the Government – that’s largely why National Savings and Investments (NS&I) currently sits on about £100bn of savers’ cash.
While banks and building society accounts are covered to an £85,000 limit by the Government- backed Financial Services Compensation Scheme, there is no limit on the amount you can hold with total security at NS&I.
But its rates are hardly generous.
When the new NS&I Investment Account was unveiled on May 21, some 2.35 million savers were told the account would pay an improved rate of 0.75 per cent, against a previous rate of 0.2 per cent to 0.3 per cent gross.
Savers can no longer use the Post Office to transact the account. Now, deposits and withdrawals must be made directly with NS&I via the post.
The £4.4bn in the NS&I Investment Account is getting battered by inflation. Life is not much more fun in the NS&I Direct Saver, paying 1.5 per cent, which holds about £1.7bn.
When rates are as low as that, it’s hardly surprising that tens of thousands of savers have sunk a massive £43bn into premium bonds, where monthly- winning cheques, invariably for £25, mean an effective interest rate of 1.5 per cent.
The next option for desperate savers is fixed-rate bonds; although mortgage rates have edged upwards since January, banks and buildings societies are cutting returns for savers.
Financial data agency Moneyfacts says one-year bonds show an average return of 2.63 per cent, the lowest since March last year. A year ago, the average rate was 2.94 per cent.
The availability of these accounts is rising, however, from 101 last month to 139 now.
Moneyfacts says the best one-year payers are United National Bank (3.45 per cent on minimum £2,000); Close Brothers Savings Select Gold (3.45 per cent on £10,000) and Allied Irish Bank (3.40 per cent on £1,000).
Moneyfacts says 127 Isas currently available can beat inflation, obviously helped by their tax advantage, though they are limited by the amount that can be invested (£5,640 per annum).
By comparison, only 32 non-Isa accounts beat inflation, all of them fixed-rate bonds.
If the chaos widens, the obvious compromise for many small savers may be to balance any risky assets with cash, bonds and funds invested in major global companies best equipped to outlast the storms.