Savers in for ‘rough ride’, with cuts to savings rates anticipated before the end of the year if base rate falls
Savers are being advised to lock their money away in fixed-rate savings accounts ahead of an anticipated cut in the Bank of England base rate.
Economic analysts had originally predicted a 0.25 percentage point cut on 2 August but this never came. Many are now expecting a cut before the end of the year, which would bring the base rate down to 0.25%.
Thousands of savers can expect to see the rates on their accounts cut in the weeks following any base rate reduction. Higher-rate taxpayers with large amounts saved will lose out the most from a 0.25% cut. Someone with £50,000 in savings whose rate is cut by 0.25 percentage points will lose £125 a year in interest before tax, according to website Moneynet.co.uk. A basic rate taxpayer would lose £100.
Fixed-rate accounts, or bonds, pay higher rates to savers and guarantee that the rate won’t change for the period of the bond. This makes them unsuitable for people who need instant access to their money, but they work out better for those that don’t.
“Savers might have avoided a base rate cut last week but it looks likely to happen soon and, combined with the impact of Funding for Lending, savers are in for a rough ride,” says Andrew Hagger of Moneynet.
Under the Funding for Lending initiative, the Bank of England will lend money at below market rates to banks and building societies. This will make them less reliant on the money they take from depositors, which could reduce the incentive for them to offer market-leading savings rates.
“If you are considering a fixed-rate account, act now,” says Hagger.
Susan Hannums of website savingschampion.co.uk agrees: “If you want to shield yourself from a change in the base rate a fixed account is the obvious option.”
Accounts that require savers to fix for more than two years barely pay more than one- or two-year accounts, says Hagger. He suggests opting for Aldermore, which is paying 3.45% for a year on a minimum of £1,000. For two years, the AA is paying 3.80% on deposits of £1 or more. Hannums suggests those with Isa money look at Aldermore’s one-year fixed-rate Isa paying 3.3% on £1,000 or over.