Battle looms for savings as millions take out cash to cover rising living costs

News - Savings

Written by Ray Clancy

Monday, 06 December 2010 12:04

UK Savers are continuing to withdraw cash deposits despite increases in average returns with seven million taking out cash in the last six months to cover rising living costs, research shows.

The average rate of interest paid during the three months to the end of November for cash deposits of £25,000 was 1.04%, up from 0.99% in the previous quarter, according to Investec Bank’s Savings Index.

However, this still compares poorly to the average rate available for the top five ‘best buy’ savings accounts of 3.44% for balances of £25,000 or more, it also shows.

Although the rate of interest paid for cash balances of £25,000 increased across nine accounts between 23 August and 3 November 2010, banks and building societies decreased the rate paid on 42 accounts and maintained them at the same level on the remaining 712 accounts. During this period, the Bank of England base rate remained static at 0.5%.

However, Investec says that over the six months to September 2010 more than a third, 36%, of UK adults, equivalent to over seven million people), have reduced the amount of cash they hold in saving and deposit accounts in order to cover rising living costs such as rental and mortgage repayments.

‘Whilst it’s encouraging that the average rate of return has risen over the last quarter, it’s important that savers, particularly those with larger deposits, check the rate they receive. Many accounts for larger deposits either pay derisory rates or introduce short term, headline grabbing rates to attract savers and once these expire, returns can drop dramatically,’ said Linda McBain, head of Banking at Investec Bank.

According to research from September 2010 by Investec, less than one in five, 19%, savers are aware of the exact rate of interest that they are earning from their deposits and just a third knows the approximate rate.

A separate report shows that in the last three months the number of one year bonds paying 3% or above has increased dramatically from three to 17. Bank base rate has been on hold for the last 20 months and in that time the average one year fixed rate bond rate has varied by 0.71%.

A battle is on to attract the maturing monies from these accounts, according to Michelle Slade of Moneyfacts. ‘Providers are relying more heavily on in house sources of funding, such as savings balances, rather than entering the money markets to fund their lending activities,’ she said.

‘Competition was rife in the one year bond market in November 2009 and now providers are upping their rates in order to take advantage of the large volumes of maturing monies that are re-entering the market. Savings providers are prepared to pay a premium in order to attract new money,’ she explained.

‘Going forward, the wide margin between base rate and savings rates may become unsustainable for providers. Once base rate does start to increase, providers may opt to only pass on part of the increase to savers in attempts to reduce this margin. In the current low rate environment, the most competitive bond rates tend to only last for short periods. Savers should act fast or they may lose out,’ she added.