Damage limitation for savers as old bonus accounts fade

Savers who tucked their money away in a bonus-laden account before the consequences of the Funding for Lending Scheme struck now need to prepare their next move or see their nest eggs flounder.

The few institutions that offered 3% on their easy access accounts last year – notably ING Direct and Santander – supported these accounts with temporary 12-month bonus rates, which will soon (if they haven't already) revert to a ‘standard’ rate of 0.5% or lower.

And with the level of inflation currently at 2.8%, savers risk falling further behind the rising cost of living if the returns on their savings are allowed to fall to as little as £1 in every £1,000.

A 2012 table demonstrates how the rates on bonus accounts crumble. For more, see our guide on Savings and Bonus Rates.

Savings Vs. Inflation

Despite driving down mortgage costs to their cheapest level in 14 years, the Funding for Lending Scheme has been catastrophic for savers.

As banks now have access to cheap government funds, they no longer need to compete for retail deposits by offering competitive rates.

The average easy access account now offers less than 1%, making it extremely difficult for savers to keep pace with inflation.

Only Skipton Building Society’s seven-year fixed-rate bond, at 3.5% (2.8% net), and First Direct’s cash ISA, at 3% (min. £40,000), are currently able to match inflation. But both accounts have restrictive criteria, putting them outside the reach of the vast majority of ordinary savers.

Skipton BS is one institution currently matching inflation, but savers would not expect to see their funds until 2020.

Damage Limitation

Instead, it has become an exercise of damage limitation, with savers simply hoping to minimise the impact of inflation by seeking the best returns they can find.

And those with old and expiring bonus accounts could improve their returns by up to 18 times if they seek the best accounts on the market.

Mercifully, most of the best performing accounts are no longer dependent upon bonuses, so there will be no repeat of the collapse in a year's time.

Selected Leading Savings Accounts

*Reduced to 1.25% from September.

Current Account Alternatives?

The obvious alternative is current accounts. Nationwide's FlexDirect account, launched last year, offers a staggering 5% interest on balances up to £2,500.

The society's new packaged account, the FlexPlus, offers 3% on balances up to £2,500, while Santander's 123 current account also offers up to 3% (balances between £3,000 and £20,000) alongside cashback.

There is no restriction on access to funds. And the new £75 million bank account switching system, set to launch next month, will allow consumers to switch accounts effortlessly in just seven days (read more in our latest guide).

This could prove to be a haven for struggling savers, who may well regard current accounts as the next feasible destination for their nest eggs.

Keith McDonald
Which4U Editor

More like this:

• Nationwide to offer 5% on FlexDirect current account.
• Featuring Nationwide's new FlexPlus packaged current account.
• Santander 123 Current Account. Initial Review.
  

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