Just two standard savings accounts now protect savers from the rising cost of living, as the demise of introductory bonus rates threatens to rid the market of any meaningful returns.
Only the cash ISAs from Virgin Money and First Direct allow savers to match inflation, with tax-free returns of 3%. And neither are the most accessible of options.
The Virgin account requires savers to tie up their money until 2018, while the First Direct account will only return the top rate on balances above £40,000.
There are a number of regular saver accounts offering rates on or above the 4% mark, but savers would need access to a branch of the West Brom, Kent Reliance, or Cheshire Building Societies, and would have to endure starting from scratch and saving just a small amount per month.
Bonus Rates
The introduction of the Government’s Funding for Lending Scheme in August last year has had a grave effect on introductory bonus rates, which until recently had kept savings accounts in touch with inflation, even if only temporarily.
According to financial analysts Moneyfacts, the number of bonus-laden accounts has more than halved since the lending scheme began, from 73 in August last year to just 32 at the beginning of May.
The average bonus rate has also reduced by almost half, from 2.7% to just 1.45%.
It is unlikely to turn around soon, either. An extension to the Funding for Lending Scheme, widely attributed as the single most significant cause of the collapse in savings, has already been announced.
This, from June 2012, shows how some accounts flatline (ING / Halifax) after the temporary bonus rate expires. Returns on flat-rate accounts (without bonus) are not always as competitive for the first year, but they can catch up with weaker accounts soon afterwards.
Stay Its Hand
There has been plenty of scepticism – from here as much as anywhere – about the manipulative culture of ‘teaser’ bonus rates that disappear overnight and leave savers high and dry.
And Martin Wheatley, chief executive of the Financial Conduct Authority, has spoken a number of times about his plans to enforce changes.
Last month, he described these accounts as a tool for the savviest, with the most severe examples being “the financial equivalent of the Venus fly-trap.”
"The smart consumer switches at the end of that year to a new teaser rate," he said. "What do most people do? - Nothing! They stay in these products like a frog boiled in water." (Read more.)
But with inflation tipped to rise above 3% in the coming months due to rising food and fuel prices, savers risk becoming trapped in a dangerous spiral of long-term real losses.
It may yet be prudent to educate rather than regulate, lest we lose one of the few incentives left offering any hope to savers in the market for standard retail accounts.
(Our 2012 guide will tell you a little bit more about how bonus rates work and how to manoeuvre around them.)
Keith McDonald
Which4U Editor
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