Should there be a basic savings rate?
The Bank of England announced an increase in interest rates with effect from the 2nd of August 2018, reported the Guardian newspaper that day.
The bank rate rose from 0.5% to 0.75% - the highest it has been in almost 10 years (the rate of 0.5% was introduced in March 2009 in response to the financial crisis affecting the global economy at that time).
The effect on your savings
In theory, of course, a rise in interest rates should be good news for savers, who might reasonably expect the increased rate to be passed on by their bank or building society in the way of better rates of interest.
On past performance, however, an article in the Mirror newspaper on the 3rd of August 2018, said any such expectation might be frustrated, since only around a half of banks have typically passed on higher rates of interest to customers with savings accounts (borrowers, on the other hand, are rather more likely to suffer the increased rate of interest).
Although the increase from 0.5% to 0.75% in the basic bank rate is a relatively small rise, if you are looking to maximise the return on your savings, therefore, you need to shop around very carefully to find the best rate of interest – especially if your savings have been with the same bank or building society for some time and your savings play an integral part in your longer-term pension planning.
A basic savings rate?
The relative unresponsiveness of many banks and building societies to the most recent increase in interest rates is also likely to throw into relief plans already being considered by the Financial Conduct Authority (FCA) to impose a “basic savings rate”, as reported by the BBC on the 25th of July 2018.
The FCA is concerned that some banks and building societies are abusing the natural inertia of many customers who leave their savings for the long-term in instant access accounts without shopping around for more competitive rates of interest.
The longer the savings account is in existence, the more steadily the rate of interest seems to have declined, with the result that some instant access savings accounts are paying as little as 0.05% in interest a year.
Proposals currently under consideration by the FCA involve banks and building societies setting their own basic savings rate, which would then apply to any instant access savings account after a minimum period of, say, one year. Since those rates would then be published by the FCA, consumers might be better encouraged to shop around for the most competitive alternative deals.
As things stand, the FCA has disclosed that:
- a third of all instant access savings accounts have been open for five years or longer;
- savers could improve their rate of return on instant access savings accounts by an average 0.82% if they switched to another account; and
- long-term holders of such accounts could currently be losing a combined total of up to £480 million through uncompetitive rates of interest.
Unsurprisingly, opposition has been voiced by the banking industry to the FCA’s proposals on the grounds that banks and building societies are already doing more to improve communication and transparency with customers on the savings rates available.
The data cited in this piece is correct as at the time of writing