Savers pay the price

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated: 19:00 EST, 20 August 2002

SAVERS have been targeted for harsh interest rate cuts over the summer by some of the biggest banks and building societies.

Ten of the leading savings groups have cut savings rates on some accounts by up to 0.25%, even though the Bank of England base rate has stayed at 4% since last November.

The culprits include Abbey National, Halifax, Barclays, Nationwide, Intelligent Finance, Northern Rock, Chelsea and Yorkshire Building Society.

Further cuts cannot be ruled out. The banks and building societies have trotted out a variety of excuses but there are two core reasons. First is the need of banks to retain profit margins. Second, savers have been scrambling to the safety of deposit accounts, so building societies are getting too much money.

Some building societies cannot afford to keep paying the same level of savings rates while mortgage rates remain low. Savers are paying for the mortgage war being waged by some societies.

It is a double dose of bad news because inflation excluding mortgage payments increased to 2% last month. This must be the minimum interest rate target for savers who want to maintain the value of their money.

Yet a quarter of accounts pay less than 2% before tax, research from independent financial adviser Chase de Vere shows. The research, based on deposits of £10,000, shows half of accounts pay less than 3% before tax - which works out at 2.4% for basic rate taxpayers and 1.8% for higher rate payers.

The cuts have come across the board - on internet, postal, telephone, card and High Street accounts.

People with Intelligent Finance telephone and internet accounts have suffered three cuts - shaving nearly 1% off rates since November's last move in Bank of England base rate from 4.5% to 4%.

Before the cuts, they earned 4.76% but, earlier this month, were receiving just 3.8%.

On a £10,000 sum, savers earn £96 less income before tax because of the cuts. If the bank had only cut by the equivalent of base rate, they would be only £50 worse off.

Nationwide e-Saver customers have suffered a 0.25% drop in their rate, down to 4% (worth 3.2% after 20% savings tax). Its Isa savers also suffered a 0.25% cut.

Northern Rock shaved the rate on its Tracker Online by 0.15% to 4.35% (3.48%). Chelsea Building Society will be the latest to make cuts when it takes 0.25% off its Call-Direct Advantage this week.

The new rate will be 3.75%, in line with its guarantee that it will pay no less than 0.25% below base rate until October next year.

Savers in its Guaranteed Bond now earn 4.1%, down 0.15%. The society guarantees the rate you earn will not fall below base rate until July next year.

Beware of accounts with a guarantee that looks better than it is. Barclays Tracker Savings Account guarantees to pay within 0.75% of base rate - but only to savers with at least £50,000 in their account.

On £10,000 the guarantee falls to base rate less 1.2%, so savers earn just 2.8% before tax. Most guarantees apply for a fixed period and you can lose out once it finishes.

Egg Standard account holders earn just 2.5% before tax. Before the guarantee ran out, they earned base rate less 0.5%, which would be worth 3.5% now.

Some banks and building societies offer high rates but have onerous terms and conditions. Safeway has raised the rates on its notice account to 4.3% before tax (3.44%) on deposits of £500 or more.

But you can make only three withdrawals a year. And while you have to give 60 days' notice if you want to take your money out, the rate can be cut without warning.

Birmingham Midshires Telephone Plus is a better alternative. You earn 4.5% (3.6%) including a 0.5% bonus payable for the first year.

You can make two withdrawals a year - or one withdrawal and then close the account and still earn the full rate. And you have easy access to your money, so if the rate becomes uncompetitive you can simply leave.