Dealing with a fall in your savings income

Posted on: 18 February 2009 by Gareth Hargreaves

Millions of Britons who rely on their savings to boost their income will be reeling from the shock of the latest cut in base rate, now at its lowest ever level of 1%.

In the past 15 months since the base rate started on its downward course, variable rate savings accounts have been slashed.

A saver with a £50,000 nest egg in a typical High Street account has seen their monthly income fall from £190 to just £33 - a fall of more than 83%.

However, the cost of food, fuel and other bills has remained the same or increased, leaving many elderly savers struggling to make ends meet.

Figures from the Bank of England released last week show just how dire the situation is for savers. The average easy access account is now paying just 0.51%, the lowest ever recorded - and the typical cash Isa rate is just 1.38%.

Already, some accounts are paying absolutely no interest at all on savings - and more are likely to follow.

While all savers will be suffering from the swingeing cuts, it's those income seekers - the elderly savers who worked all their lives to amass nest eggs they could rely on when they retired - who are worst hit.

And those depending on savings for income need to take action now. Experts predict rates have further to fall.

If you have any money in an easy access account and you are happy to tie it up, move it now into a fixed-rate account. The rates might be dreadful compared with a few months ago, but they are much better than sticking to a variable rate account.

But pick the right one. There is a wide gap between the best and worst.

Coventry Building Society's new bonds pay 2.91% after tax (3.64% before tax) on monthly income fixed for one, two or three years. Others pay as little as 1.28% (1.6%).

This may not sound a great deal, but it's nearly three times the base rate and therefore is unlikely to be on sale for long.

On £10,000, 3.64% translates into £291 a year after tax - or £24 a month. But even at this rate you'll need £40,000 to see around £100 a month after tax. If you don't need income, the rate is 3% (3.75%) on a minimum of £1.

Both NatWest and RBS have launched a Fixed Rate Pensioners account, on offer to those aged 60 or over, paying a monthly income of 2.8% after tax (3.5%) on £25,000 or 3.2% (4%) on £50,000. The bond starts on 16th March and runs for two years. Until it starts, you earn 0.6% (0.75%) on your money.

Going for a one or two-year deal could prove a better move than a longer-term bond. Experts expect rates to stay low for a year or more.

Professor Peter Spencer, from management consultants Ernst & Young's ITEM club, says, “The economy is so weak that the base rate will fall to 0.5%, and maybe a bit lower. But in the longer term, we need to encourage more savings.

“When they can, the authorities will push rates up quickly and they will go up to higher levels than in recent years. But I do not expect things to be better in a year's time. You can safely go for 3% for two years.”

At consultancy Capital Economics, UK economist Vicky Redwood says, “We expect the base rate to fall to zero or 0.1 or 0.2% by April and rates will stay low, possibly for 18 months to two years. A decent fixed rate for two years looks a good deal.”

Have your savings been hit by the current economic climate?

Let us know by leaving a comment in the box below or share your thoughts with other readers in the 50connect forums.

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