Toughest times for savers

That is how things could turn out if the prediction, by the Ernst and Young Item Club, that the Bank of England base rate (BBR) will remain at 0.5 per cent until 2014 is accurate.

The 0.5 per cent rate, set in March last year, is at its lowest level since the bank was founded in 1694.

It was seen as a dramatic move by Gordon Brown to kickstart the economy ahead of the election.

Now it could have a much longer run. With the Governor of the Bank of England confirming that he wouldn’t increase the base rate even if inflation rose, savers might be sacrificed for years, largely to avoid carnage in the housing market.

The new Nationwide BS savings index says pessimism is creeping up on savers who expect to be saving less in six months’ time. Yet the number of consumers who say that the Government discourages them from saving has fallen since the coalition took over.

It is certainly harder to find much reason to save. The average rate on instant access accounts is down to 0.68 per cent.

On notice accounts, tying money up for 30 to 90 days, it is 1.03 per cent.

Inflation, by any measure, tops three per cent.

As rates plunged, savers turned to inflation-beating, index-linked savings certificates from National Savings & Investments (NS&I), limited to £15,000 per saver per issue. They guaranteed to match the rate of inflation over three or five years and pay an additional one per cent on top, tax-free.

But the certificates, introduced in 1975, were withdrawn overnight because they sucked in £11bn over five years and drained money away from banks and building societies.

Many people haven’t yet realised how dramatically income from savings has collapsed.

Andrew Hagger, at Moneynet.

co.uk, says: “In November 2008, it was still possible to get seven per cent on fixed rate bonds for one, two and three years, so there are still plenty of people to come off one of these excellent rates. They will be horrified new deals on offer pay such a miserly return in comparison.”

The bigger problem is that many savers don’t know what their money actually earns.

A new survey by Moneysuper market.com says one in three savers never check what rate their money is earning, and 57 per cent have never switched their savings account.

This typically costs them £245 lost income on £10,000 worth of savings, or a whopping £1,715 over seven years. In total, savers’ lethargy costs a massive £9.4bn a year.

There is, perhaps, only one benefit in assuming that rock bottom savings rates are here to stay. Fixed rate bonds over three and five years look more attractive when a better offer is less likely to come trundling along next month.

Many savers previously avoided fixes, expecting higher rates would arrive this side of Christmas.

Now, Bank of Baroda’s internet bank savings accounts – five years at 4.9 per cent, three years at 4.3 per cent, two years 3.8 per cent, and one year at 3.15 per cent, all on minimum £500 deposits – look more attractive.

The offer is open online through Moneysupermarket.com, although Bank of Baroda has more than 20 UK branches.

Another Indian bank, ICICI, has a similar range of fixes: 4.75 per cent (five years); 4.15 per cent (three); 3.70 per cent (two); and 3.10 per cent (one). Like Baroda, it is covered by the UK Financial Services Compensation Scheme, which entitles savers to claim up to £50,000 for the single named account or £100,000 for joint accounts, the same protection as you get from other High Street banks.

Coventry BS’s two year Bank of England base rate Tracker Bond, expiring in September 2012 on minimum £1 deposits plus anything else paid in before September 30, starts at 3.20 per cent, and stays 2.20 per cent above Bank base base, once BBR tops one per cent.

Santander’s Loyalty Tracker Bond (Issue 1), launching this week, pays three per cent gross and stays 2.50 per cent above BBR until September 1, next year, on minimum £10,000 deposits.

To qualify, customers need a main current account, mortgage or investment account with Santander, or they must open a current account by switching through the Account Transfer Service.

Barnsley BS’s Fixed Rate Online ISA pays a fixed three per cent until December nextyear.

Cumberland BS’s two year ISA is fixed at 3.25, while Birmingham Midshires pays 4.25 per cent, fixed over five years.

For those who need more flexibility, options include the Post Office Reward Saver account, paying 2.5 per cent variable (including one per cent bonus for first 12 months) on minimum £500 deposits with withdrawals free after 30 days notice, and AA Savings, paying 2.80 per cent on minimum £1. But the AA account includes a 2.3 per cent bonus for the first year, so customers must switch then to avoid a derisory 0.5 per cent return on their cash.

However, Patrick Connolly, at financial advisors AWD Chase de Vere, thinks a critical moment has arrived in the savings market. His view is that most savers need a £5,000 cash buffer to deal with financial emergencies and then they should save a further £5,000 to build a portfolio of managed funds.

Paul Killik, at brokers Killik & Co, thinks savers should note the large, well-covered dividends – despite these straitened times – paid by Britain’s global giants, such as British American Tobacco (5.1 per cent), Vodafone (6.7 per cent), and GlaxoSmithKline (5.5 per cent).

Remember, this Government has pledged to revive the private sector, so dividends should grow, possibly before anybody remembers the plight of building society savers.

Killik’s chosen funds include Invesco Perpetual Income, Veritas Global Equity Income and Law Debenture.

Others believe Threadneedle’s Managed Income Fund can identify leading companies where dividends can be maintained or, preferably, increased to put more cash into investors’ pockets.