It is a graphic illustration of how dire the national finances are that one of the most competitive savings products in the UK at the moment is offered by the Government.
Normally the security of a Government-backed scheme means that it does not need to match commercial rates: but these are not normal times.
National Savings & Investments has just issued new Guaranteed Growth Bonds and Guaranteed Income Bonds, offering rates of up to 4.60%. In a market where many savings products are paying less than 2% and instant access accounts may pay 0.10% or less, the Government's savings products are difficult to beat.
John Prout, director of customer sales and retention for NS&I, explains: “Customers can choose to invest between £500 and £1m in our one, two, three or five-year bonds.
“With the new rates starting at 3.85% gross/3.92% AER for a one-year bond, we hope that the new issues will be highly attractive to customers who are looking for a guaranteed fixed rate of interest, coupled with 100% security for their money, as NS&I is backed by HM Treasury.”
The very best of the savings products available in the market at present are only slightly better than this.
Of the medium term bonds available, ICICI pays 4.70% on its three year bond, Birmingham Midshires (part of the Lloyds Banking Group) pays 4.65%, as does the Yorkshire Building Society and the Hinckley & Rugby Building Society.
Only slightly less good is the Post Office Growth Bond, offering 4.55%. But because the Post Office has now become a major competitor to NS&I, by mutual agreement it is ceasing to sell NS&I products on behalf of the Government.
But consumers should be aware that savings products branded as ‘Post Office' are actually supplied by Bank of Ireland and subject to the Irish consumer protection scheme, not that of the UK.
Long bonds pay more
Depositors willing to lock up their money even longer can earn higher rates of return. Skipton Building Society pays 5.35% on its five year fixed rate bond; the Yorkshire Building Society pays 5.30% and Barclays, Halifax and the State Bank of India offer 5.25% — all as five year bonds.
The best of the savings accounts perform much less well than bonds. Of the Northern Ireland-based savings accounts, the best is a seven day postal notice account provided by the Progressive Building Society, paying 2.65% at £500. The City of Derry Building Society has a 90 day notice account, on which interested is graduated — starting at 1.25% at £1,000, rising to a maximum of 2.75% at £100,000.
Of the internet-based savings accounts available to residents of Northern Ireland, the best is the ‘Online Goal Saver' from the Saffron Building Society, paying 2.85%. The best cash ISA is from the Chesham Building Society, at 3.25%. And the best cash ISA bond is for five years, provided by the Leeds Building Society and paying 4.60%. Also worth considering is a new product from the Nationwide Building Society — a stepped bond paying 3.75% in year one, rising to 5.25% by year four.
But it is sensible to consider more than headline rates. Other considerations include the strength of the financial institution and which country's deposit protection scheme it is covered by.
A further factor with savings accounts (as distinct from fixed interest bonds) should be how likely an institution is to remain at the top of the best buy tables.
Interest rate cuts
Research just published by analysts Moneyfacts found that one in ten savings accounts had its interest rates cut since March — a period in which there were no reductions in base rate. Institutions cutting rates include Clydesdale Bank, the Leeds Building Society, Yorkshire Bank and three arms of the Lloyds Banking Group — the Bank of Scotland, Halifax and Intelligent Finance.
Michelle Slade of Moneyfacts says: “Savers are already experiencing some of the lowest rates ever and this will be another bitter blow to take.
“Once again it is savers, such as pensioners, who rely on the income from their savings to supplement their income, who end up worse-off. Savers will be asking how providers can justify cutting rates further, when bank base rate have remained on hold.”
Slade adds that several institutions appear to have cut interest rates in advance of new regulations requiring them to give two months' notice of rate cuts. She suggests that consumers check rates regularly and change providers where appropriate.
Moneyfacts has assisted consumers in judging institutions' track records on savings rates with its latest ‘Consistency Survey'.
This reports that building societies are much better than banks in maintaining good interest rates, with almost eight out of 10 of the most consistent savings products provided by societies. Best of all were Birmingham Midshires and the Bath Building Society. Earl Shilton Building Society was consistently good on its cash ISAs.