'Funding for Lending has been a silent assassin': How savers have been deprived of £2.6bn in interest over the past year

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT

Updated: 04:11 EST, 24 July 2013

Falling rates: Interest on savings has crashed since the Funding for Lending scheme launched

Savers have been deprived of £2.6billion in interest over the past year, Money Mail can reveal.

The latest victim of the crash in rates has been Premium Bonds, which yesterday cut interest from 1.5 per cent to 1.3 per cent - lowering chances of a payout from 24,000 to 26,000 to one.

Interest on savings has crashed since the Government introduced the Funding for Lending Scheme on August 1 last year.

The rates banks and building societies are prepared to pay new savers have virtually halved - even though the Bank of England base rate has been frozen at 0.5 per cent since March 2009.

These falls, in turn, have made National Savings & Investments products, such as Premium Bonds, even more attractive. As a result, they also have been cut.

Sue Hannums, director at data analyst Savings Champion, says: ‘Funding for Lending has proved a silent assassin for savers. It has had a much bigger influence on rates than the Bank of England lowering the base rate to an all-time low of 0.5 per cent. The downward spiral shows no sign of letting up.’

Simon Rose, of campaign group Save Our Savers, says: ‘Funding for Lending has been an utter disaster, halving some savings rates and causing untold misery to savers and pensioners.’

The group estimates savers have lost £2.6billion interest since the scheme began.

This time last year, banks and building societies paid an average 2.6 per cent, including an initial bonus, to woo new savers into cash Isas, figures from the Bank of England reveal.

Now it is down at 1.32 per cent, just short of a 50 per cent fall.

The rates excluding the bonus - which can be as little as 0.1 per cent - are an average 0.68 per cent, down a huge 52 per cent from 1.42 per cent.

This time last year, savers had £206billion in tax-free cash and earned £5.5billion interest.

Now they have £218billion, but institutions pay out less interest - a total of £5.33billion - because the average rate paid out in total on cash Isas has fallen from 2.69 per cent to 2.44 per cent.

These rates include any bonuses that banks and building societies are paying savers who have opened an account in the past 12 months.

It might not look a large fall, but if banks and building societies still paid the higher rate, savers would earn £5.87billion - so they are losing out on a total of £540million in interest just on their cash Isa savings.

Rates began to fall last summer after the launch of the Bank of England Funding for Lending Scheme. This gives banks and building societies access to £80billion of cheap money from the Bank of England - so they are less reliant on savers.

Easy-access rates for new savers are down 46.5 per cent and one-year fixed-rate deals down 44 per cent since last August.

Savers hold £402billion in easy-access accounts with banks, earning 0.96 per cent on average - or £3.86billion in interest.

If they earned the 1.03 per cent average paid before Funding for Lending arrived, banks would have to pay out a higher £4.14billion in interest. Over the year savers have lost £280million.

Savers hold a further £266billion in notice accounts and fixed-rate bonds, where they earn about £500million less interest than if rates had not fallen.

A year ago, savers could earn 2.56 per cent (3.2 per cent) in an easy-access account. Now the best rate is half that at 1.28 per cent (1.6 per cent) and even at this top rate you are limited to the number of free withdrawals you can make.

The top one-year fixed-rate bond this time last year paid 2.88 per cent (3.6 per cent). Now the best rate is 1.64 per cent (2.05 per cent) from Kent Reliance or 1.62 per cent (2.03 per cent) from Britannia, part of Co-op Bank.

The top-paying easy-access cash Isa returned 3.3 per cent tax-free, while today it’s two per cent.