Fed up of the savings merry-go-round? Churning best-buy rates is irritating

Our third savings account of the year lasted a month. 

Like many savers I was a bit miffed last week when NS&I cut the rate on its easy-access income bonds from a best buy 1.15 per cent to 0.01 per cent. Particularly as I’d only just transferred our money into them four weeks previously. 

That was when I’d got round to closing down our RCI Bank savings account, which had paid 1.2 per cent when we opened it – but days afterwards in May was cut to 1.05 per cent. The ‘Freedom account’ now pays 0.57 per cent.

Before that, I’ve forgotten who we were with. I know we missed out on the Marcus by Goldman Sachs account, which had been a popular best buy in the first few months of the year but lowered its rates after the Bank of England reacted to the Covid crisis.

We have also paid into a regular saver account with First Direct in recent years, which used to pay 5 per cent and now pays 2.75 per cent.

Now it’s none of these providers’ faults that the Bank Rate (which is commonly referred to as the Bank of England base rate) was slashed from 0.75 to 0.1 per cent in March.

Far from it: it’s fair play to each one of them that they were willing to pay a top rate, even if it was only for a matter of months. In the case of NS&I though, it was all rather drastic.

Anna Bowes at Savings Champion says it’s ‘one of the most extreme rate cuts’ she’s ever seen, taking NS&I as it did from hero to zero.

A couple of months ago I advised my wife’s grandma to put the money from the sale of her home, which was sitting in a bank account, into NS&I income bonds. She spent a long time on the phone that afternoon, over multiple calls, and was quite stressed by the amount of admin that was required for her to complete the transaction.

In contrast it took me 10 mins to process ours online.

Our sister title reported this weekend on the services nightmare experienced by many NS&I customers this year. Anna Bowes commented that management at the government-backed savings arm knew there would be massive inflows after rate cuts elsewhere had left it the best buy.

NS&I will cut its 1.15% Income Bonds to just 0.01% from November, an enormous slashing which leaves them paying as little as accounts offered by Britain’s biggest banks

‘How is the call centre going to cope now with what will doubtlessly be a massive exodus?’ she added. 

‘We know people who even before the cut were trying to get at their cash – for instance to buy a home – and experiencing delays.’

NS&I have funding targets set by the Government that they must try and hit. So they can only take so much in savings deposits and must regulate their rates so they are not too attractive compared to the competition.

I asked NS&I why they would encourage such massive inflows, if only then to have to encourage outflows in order not to break their quota.

‘When setting interest rates, NS&I has a duty to balance the interests of savers, taxpayers and the broader financial services sector,’ they replied.

‘In April, due to the Covid-19 pandemic, we cancelled interest rate reductions, scheduled for 1 May, on our variable products. 

‘Since then, several of our products have risen to the top of the savings “best buy” tables and as we have kept our interest rates unchanged, we have faced high demand.

‘We believe that, after six months, it is now the right moment for NS&I to return to the third quartile where we are usually positioned against the interest rates offered by the banks and building societies.’

They added: ‘In July this year, NS&I’s Net Financing target for 2020-21 was revised from £6billion (+/- £3billion) to £35billion (+/- £5billion) to reflect the Government’s funding requirements during the Covid-19 pandemic.

‘In Q1 2020-21 (April-June), NS&I saw inflows of £19.9billion and delivered £14.5billion of Net Financing. Demand for NS&I products has remained at similarly high levels during Q2 (July-September).’

So, reading between the numbers, sort of fair enough: they were asked to rake in more cash quickly by the Government, so they did but overshot and had to pull back. 

But it’s heavy on the accelerator and heavy on the brake, leaving savers with a touch of whiplash.

One thing to note, if you are an NS&I customer income bonds holder is that the rate remains until November, so the account will pay 1.15 per cent until then.

But more top easy access rates have been slashed this week in reaction to NS&I’s cut. The best that remains is Coventry BS’s ‘two withdrawals and you’re out’ kind-of-easy-access account at 1.1 per cent, and lord knows how long that will last.

Notice accounts no longer offer a good middle ground after some decent rates were cut earlier this year. The rates on fixed-term accounts have not seemed worth it recently, but those with spare cash might now have to consider them. 

At one year, you can get an ‘expected return’ of 1.26 per cent with sharia-compliant Gatehouse Bank: with such meagre alternatives, even if you might need to withdraw your cash, it’s probably worth the risk.

The hoke-cokey over savings rates is nothing new. High teaser rates were common even when the base rate was 4 per cent. Banks and building societies would issue eye-catching accounts only to cut them months later once they had their customers.

At least now many savings providers explicitly advertise bonus rates, which the customer knows will fall after a certain period. Regulation that restricted fiddling with savings rates – i.e. launch rates have to be maintained for, say, six months – would merely see a race to the bottom, with worse rates offered. 

So the situation – as is usually the case – favours the active switcher who deals online. Rather than the elderly saver who wants peace of mind and a responsive provider they can talk to.