With today marking the fifth year that base rate has been at its historic low of 0.5% – as confirmed by the Monetary Policy Committee earlier today – savers won't exactly be rejoicing. The combination of low base rate and the reduced need for banks to compete for savers' cash has meant interest rates are also at their lowest ever levels, and that's left a lot of investors with meagre returns.
In fact, research has shown that savers could have potentially lost out on thousands of pounds worth of interest over the last five years, highlighting the difficulty savers are having in producing meaningful income.
Calculations from Wesleyan Assurance Society show that, if someone had amassed £10,000 in savings by March 2009 and had kept it in an account paying base rate, they would have received just £252.51 in interest. However, if they'd shopped around and found an account paying 2.5%, their interest figure would be £1,314.08 – meaning they'd have lost out on over £1,000 if they'd kept it in a low-paying account.
The figures are even starker when looking at those with bigger savings pots. Someone with £25,000 in savings could potentially have lost out on over £2,600, while someone with a healthy £100,000 in savings could have lost a whopping £10,615.70 in interest if they failed to seek a better account.
Combine these figures with Moneyfacts' analysis and it shows just how difficult it is to secure a meaningful return. Our figures show that a basic rate taxpayer will need to find an account paying at least 2.38% just to counter the effects of tax and inflation, while a higher rate taxpayer will need an account paying 3.17%. Even worse, inflation has actually eroded the value of your money – £10,000 invested five years ago would have the spending power of just £8,840 today.
Shop around. This is the key piece of advice given to savers as the only way to increase your chances of securing a decent interest rate is to see what else is out there, as complacency could easily mean your savings are left languishing in an account paying the bare minimum. Make sure to use our comparison tool to find the best home for your money and ensure you're not losing out on valuable interest.
It won't be easy to find a higher-paying account, however. Five years ago the top-paying no notice account paid 3.35% whereas today the equivalent account will offer just 1.50%, so if you want to stand the best chance of getting a decent rate you'll have to lock your money away.
Fixed rate bonds and notice accounts offer the most probable source of income, and can be the ideal choice for investors who won't need access to the funds. Currently the top-paying account comes from FirstSave, with its 7 Year Fixed Rate Bond offering a highly competitive 3.50% – on the provision that you lock your money away for the full seven years, as early access won't be allowed. Aldermore offers a slightly shorter term alternative, with its Five Year Fixed Rate Account paying 3.00%.
Don't forget about cash ISAs either. Making full use of your ISA allowances can help lessen the impact of low base rate, and better yet, because any returns are entirely tax-free you won't need to pay the taxman a share. Again, to generate the best returns you'll need to lock your money away, but some fixed ISAs offer the flexibility of early access subject to an interest penalty. Currently the Moneyfacts pick comes from Skipton, with its Online 5 Year Fixed Rate ISA paying a completely tax-free 3.00%.
So, although five years of historically low base rate means you could have missed out on interest, it doesn't mean all is lost. Complacency can be the death knell of savings so make sure to shop around to find the best possible rates, and if you get the right account you can help ensure the next five years will produce a more meaningful return for your money.
Compare the best available savings rates
Find a home for your 2013-14 cash ISA allowance
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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