Of ever-dwindling interest

Instant access rates are shrinking further.

What do you think is the current top market interest rate for £10,000 in a new instant access account?

If you have not looked at the savings league tables recently, it may surprise you to learn that the answer is now just 2%. And that is gross, so if you are a 40% taxpayer, the net return is just 1.2%, little more than a third of the current rate of retail prices index (RPI) inflation.

You might be forgiven for thinking that the banks would be tempted to increase their rates for substantially larger deposits.  Unusually this is no attraction to them; indeed it is a positive disincentive.  A £1,000,000 investment might struggle to secure a rate of 1.5%, a net return of just 0.9% for a higher rate tax payer.

Rates have fallen for new accounts and for many existing variable rate accounts (notably the Post Office) because the banks and building societies can access up to £80 billion worth of cheap money under the Funding for Lending Scheme (FLS). The FLS was launched by the Treasury and Bank of England last summer in an effort to stimulate lending to households and businesses. So far, the main impact has been on deposit rates for investors and the mortgage market, where rates for new loans have been falling.

The drop in instant access deposit rates has rippled through to fixed term accounts, with only the longest terms from a handful of lenders now offering a rate above 3%.  This year’s cash ISA season looks set to me much less competitive than previous years, with building societies rather than banks giving the best terms at the time of writing.

We all need some rainy day money on deposit – three to six months’ cover for outgoings is a good start – but if you have more, now is a sensible time to consider ways in which you could make that excess cash work harder, if only to counter that stubbornly over-target inflation rate.

Past performance is not a reliable indicator of future performance. The value of investments and income from them can go down as well as up and you may not get back the original amount invested.

22nd March 2013

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