UK Savings Account Interest Rates – January 2013 Update

Since 2009 UK savers have seen big falls in the interest rates being paid by the top savings accounts.  For a short time there was a little light at the end of the tunnel however this looks to have likely been removed with the Government / Bank of England’s introduction of the Funding for Lending Scheme (FLS).

Money Saving Expert tells us that if you are in the market for an easy access savings account you can get a savings interest rate of 2.35% AER.  Forget to switch at the end of 12 months to the bank offering the highest interest rate at that time and that becomes 1.35%.  Back in June 2012 you could get 3.2% AER variable with Santander reducing to 0.5% after 12 months.  That’s a fall of 0.85% in only 6 months.

If you choose to go for a no nonsense easy access savings account (always my preferred option), again using Money Saving Expert, that interest rate today is 2.3% AER with West Bromwich Building Society (as long you have a balance over £1,000 and only make 1 withdrawal a year).  Back in June 2012 the best rate was 2.75% AER variable with Aldermore (again, as long you had a balance over £1,000).  That’s a fall of 0.45% in 6 months.

Why do I think the Funding for lending Scheme has caused at least some, if not all of this?  Banks can now get cheap loans directly from the Bank of England to fund Business and Mortgage loans.  The more they borrow from the Bank of England they cheaper those loans become.  Why then borrow from the average punter.  They don’t need us anymore.  Well at least for the next 18 months. 

What’s worse is that the easy access savings accounts detailed above are the best accounts out there.  My chart today shows what is happening to the average account. 

Click to enlarge

Since the FLS was introduced in August 2012 interest bearing site sight deposits from households (the red line) have risen a small 0.04% to 1.02% to October 2012.  The interest on fixed maturity savings accounts is however a very different story.  Time deposits with a maturity of less than or equal to 1 year fall 0.29% ending up at 2%.  1 to 2 year maturities fall 0.56% to 2.83% and greater than 2 year maturities fall 0.41% to 3.15%.

So what is the Retirement Investing Today Portfolio doing about low risk savings/investments?  I hold a small amount of cash within the UK (currently 4.7% of my total net worth) earning these derisory levels of savings interest.  This is effectively my Emergency Fund and it is currently earning 2.1% with Yorkshire Building Society.  This rate has not yet been cut however I’m watching carefully.  Instead of savings accounts the majority of my low risk investments are instead held as follows:
-    NS&I Index Linked Savings Certificates.  I’m a big fan of these however unfortunately they are currently not on sale.  While they were on sale I backed the truck up and so now hold about 17.7% of my total portfolio in them.
-    I hold some cash in offshore accounts currently earning 3.25% (down from 4% in June 2012).
-    Finally, I hold Index Linked Gilts both in ISA and SIPP wrappers.  

As always DYOR.