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Savers have reason to cheer, as the lending scheme whose introduction saw savings rates plummet is coming to an end. Tomorrow, the Government's Funding for Lending Scheme (FLS) which has impacted the savings market since 2012 will close.
How can a lending scheme have an impact on savings rates, you may ask. Well, the Government scheme lent to banks and building societies, which meant these providers no longer needed to rely on savers' funds. As a result, there was no need for them to make their savings rates attractive.
To illustrate, the average rate on easy access accounts was 1.03% in July 2012, just before providers could borrow from the FLS. Today, it's less than half of that, with an average of 0.48%. Fixed bonds have seen similar nose-dives over the years, resulting in the lacklustre market we find ourselves with today.
Indeed, savers who invest in a five-year fixed bond today would miss out on over £2,000 in interest on average over the whole term of the bond, compared with the average savings return five years ago (provided interest is compounded yearly; £4,193 is earned on £20,000 at a rate of 3.88% over five years, compared with £2,038.35 on the current average of 1.96%).
|Jul-12 (FLS)||Jan-13||Aug-16 (TFS)||Jan-17||Jan-18|
|Average Easy Access Account||1.03%||0.83%||0.55%||0.38%||0.48%|
|Average One-Year Fixed Bond||2.57%||1.97%||1.15%||0.92%||1.18%|
|Average Five-Year Fixed Bond||3.88%||2.59%||1.98%||1.67%||1.96%|
Unfortunately, we may not be out of the woods yet, as a new scheme was set up in 2016, the Term Funding Scheme (TFS), which will continue lending to providers for a little while longer. In addition, Rachel Springall, finance expert at moneyfacts.co.uk, points out that "while the TFS is open for drawdowns until the end of February 2018, banks and building societies will have up to four years to benefit from the funding, which takes us up to 2022. Therefore, savers have quite a wait ahead for the market to rejuvenate."
Given that rates have risen since last January, as seen in the table above, there clearly hasn't been a complete lack of competition, and this is mainly thanks to challenger banks. "Undeterred by the lack of competition in the market, the challenger banks have frequently reigned supreme in the savings Best Buy tables," commented Rachel.
"These banks are making every effort to offer savers a competitive return by closely monitoring the flow of cash into the business. They also need to build their trust with anxious savers, who may be deterred by the newness of the brand." Yet there's no reason to be afraid to save with these providers, as they are protected by the same depositor protection scheme as the big banks, if they are located in the UK.
So, as Rachel says, "savers would do well to keep a close eye on the Best Buys and consider more unfamiliar brands to boost their cash returns, especially as the savings market won't be bouncing back for quite a while."
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