Just when you thought things couldn’t get worse for savers

Credit Crunch

Perhaps the nastiest thing about the financial crisis is that the people who have been punished most are those who deserved it least – savers. When the credit crunch struck, the Bank of England slashed interest rates in a bid to bail out profligate banks and borrowers, destroying savings rates.

As if that wasn’t bad enough, last year the Bank of England tightened the screw on savers, again, to make life easier for borrowers. The Funding for Lending Scheme (FLS), launched in August 2012, sent savings rates plummeting to new lows. FLS gave banks and building societies access to cheap money, to encourage them to pump out even cheaper mortgages.

Traditionally, lenders funded mortgage rates by attracting money from savers, but thanks to the FLS, they didn’t need to do this anymore. So they effectively abandoned savers. Today, most savings accounts offer an insulting return of less than 0.5%.

Getting a higher Rate

By shopping around, you can get slightly better (but still dreadful) rates of around 1.5% with easy access, but they come with a catch. Typically, that rate will be made up of an introductory bonus that expires after 12 months. On one current best buy account that promises 1.5%, the small print points out that the bonus is worth 1%. So after 12 months, you get just 0.5%.

Other best buy savings accounts are almost entirely made up of that introductory bonus. One account, which pays 1.35%, includes a 12-month bonus of 1.25%. So after a year, you get a measly 0.1%. And there are plenty more like it. These are known as ‘teaser rates’, and are just one of the many tricks banks pull to make their products look far better than they really are.

Unless you remember to switch as soon as your introductory bonus expires, you will be left on a lousy rate. Banks rightly assume that plenty of customers will forget their teaser rate has expired, and stay on that measly rate.

City regulator the Financial Conduct Authority (FCA) has just announced an investigation into teaser rates. Chief executive Martin Wheatley has accused banks of “taking advantage of customer inertia”. Which of course they are. It is partly our own fault. We know the banks are playing these tricks, but we let them get away with it.

On the other hand, who wants to switch their savings account every year, just to get an extra 1% or so? Life is too short. And yet I’m uncomfortable with the idea that the FCA will ban teaser rates. I don’t like them, and I wish we didn’t need them. But given the dismal rates available on savings, teaser rates are the only way for savers to get any kind of return on their money at all.

If the authorities do ban teaser rates, savers will have even fewer options. Even when trying to protect savers, the authorities only end up piling on more misery.

Read more articles by Harvey Jones here

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