Savings: More misery for savers as interest rates are set to fall


Three glass jars holding coinsBeleaguered savers could see interest rates on the best buy savings accounts fall even further during 2013.

Over the past few months, savers have been hit by a perfect storm of rising inflation, Bank base rate stuck at 0.5% and interest rates on savings accounts slashed as a result of the Funding for Lending Scheme (FLS).

There are now fears life is about to get much harder for savers.

Funding for Lending Scheme to be extended

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The FLS has made it cheaper for banks and building societies to raise wholesale finance, allowing them to borrow money at a rate of just 0.25%. Having such a ready source of cheap finance has allowed banks and building societies to reduce interest rates on savings accounts.

Even those institutions who have not signed up for the scheme, have been able to reduce their interest rates, as they have no need to be as competitive.

The introduction of the FLS, in August 2012, has probably been the largest single factor in reducing savings interest rates over recent months and things could be about to get far worse.

Despite many experts questioning whether the FLS is making it easier for businesses and individuals to borrow money, the Bank of England has announced it will extend the scheme by a year, to January 2015. In a further change, banks will be able to double the amount of money they borrow from the scheme, further reducing their reliance on savers deposits to fund their lending activities.

The likely result of the extension to the FLS?

Savers will be left struggling, having to cope with even lower rates of interest on their savings accounts and taxpayers looking for real returns will find the job almost impossible, especially if inflation rises over the coming months, as predicted by the Bank of England themselves.

Speaking exclusively to Investment Sense, Simon Rose of Save Our Savers says: “FLS has been a disaster for savers. The banks have jumped at the offer of cheap money and, as a result, have seen no reason to offer decent rates to savers. Extending the scheme will push savings rates still lower.

More Quantitative Easing?

As if an extension to the FLS wasn’t enough bad news for savers, there are also predictions that the existing program of Quantitative Easing (QE) could expanded.

The Bank’s outgoing Governor, Mervyn King, has voted for additional QE at the past three meetings of the Monetary Policy Committee (MPC); he has been outvoted each time. However, research from JP Morgan Chase & Co, indicates that the Bank of England could now look to further stimulate the economy by injecting a further £80 billion into the economy, through additional QE.

Simon Rose of Save our Savers , again: “By pushing down the yield on government stocks, QE depresses interest rates across the board, devalues the worth of the pound and massively distorts markets, to the extent that the Bank of England now owns a third of all gilt-edged stocks.”

Savers are far from the only group affected by QE, retirees have seen Annuity rates plummet over the past few years as QE has pushed down gilt yields, which are linked to Annuity rates.

According to research by the Annuity provider, MGM Advantage, a male aged 65, with a £50,000 pension fund could have bought a level Annuity of £3,443 on March 2011, two years later the rate has fallen to £2,875, reducing the total pay-out by around £10,000 over the remaining life span of the retiree.

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We’d like to hear your thoughts on how falling interest rates and Annuity rates have affected you; why not leave your comments at the end of this article?

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies and helping people make their savings work harder.

If you are approaching retirement or have savings and would like advice on your options, call one of our IFAs today on 0115 933 8433, alternatively enquire online or email