Archive for the ‘Interest rates’ Category

5 percent fixed for 12 months – our best selling current account…

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Last updated: 25/10/2016

With more and more high interest current account providers announcing reductions to their interest rates, the 5% fixed for 12 months from Nationwide now looks even better than before. Here we take a more detailed look at the pressures savers are facing in these difficult economic conditions, as well as help reveal why the FlexDirect continues to be our best selling current account.

Nationwide FlexDirect account summary

  • 5.0% AER (4.89% gross p.a.) fixed for 12 months
  • Paid on balances up to £2,500, no interest paid above this amount
  • 1.0% AER variable on balances up to £2,500 after 12 months
  • You must pay in £1,000 per month to qualify
  • No requirement to set up direct debits
  • Contactless Visa debit card available
  • 12 month fee-free arranged overdraft available
  • Free text alerts to help you manage your account
  • No monthly account fee
  • Covered by the Current Account Switch Guarantee and Financial Services Compensation Scheme

Savings rates in dire straits

Our market leading instant access account (RCI Bank Freedom Savings Account) is currently paying 1.0% AER variable, whilst our best long term fixed rate (Vanquis 5 Year Fixed Rate Bond) will get you 1.95% AER – that’s an increase of less than 1% per year for tying up your money for five years, albeit the rate from Vanquis is fixed for the full term. Then of course there are a load of accounts offering rates in between these, mainly fixed rate bonds of different durations. It may be repeated far too often, but unfortunately it makes it no less true – savings rates are at record lows – and it would seem this at the very least, this is set to continue, and possibly get even worse.

Inflation into the mix

If record low savings rates weren’t enough to worry about, the Consumer Price Index rose from 0.6% to 1.0% in September, the biggest monthly rise in more than 2 years and its highest level for 22 months. Since this rise, less than half of all savings accounts are able to match or beat this level, which means many savers are seeing the value of their cash eroded in real terms. According to the Bank of England, the average easy access account now pays under 0.3%, and with further cuts to savings rates on the cards, inflationary rises are a serious cause for concern.

High interest current accounts

Although historically, current accounts offered little if anything in the form of interest on your account balance this has changed significantly in the last few years, and against this harsh economic backdrop for savers, it is hardly surprising that the high headline rates of interest on offer have made compelling reading. Indeed, high interest current accounts have been one of the most popular safe havens for those looking to combine all of the usual account features you would expect from a full banking service with a highly competitive rate.

5% fixed for 12 months

Top of the rate table is Nationwide’s FlexDirect account which offers 5.0% AER (4.89% gross p.a.) fixed for the first 12 months. This rate is paid on all in-credit balances up to £2,500 and you must pay in a minimum of £1,000 per month to qualify (this excludes internal transfers). After 12 months the rate reverts to 1.0% AER variable. There is no monthly account fee, and with top rates on instant access and fixed term deposits ranging between 1.0% and 1.95%, it is easy to see why this account has attracted so much attention.

Others falling short

TSB Bank also offers 5.0% AER but this is variable and is only paid on balances up to £2,000, rather than the £2,500 on offer from Nationwide. The rate is, however, paid ongoing rather than for a fixed period of 12 months. But TSB has recently announced that with effect from 4th January 2017, the rate will reduce to 3.0% AER variable and will only be paid on balances up to £1,500. This follows in the footsteps of Santander who announced back in August that the 3% top tier interest rate on its flagship 1|2|3 Account would be halved to 1.50%, taking effect from 1st November this year. Lloyds has also announced that the rate on their Club Lloyds current account will halve from 4% to 2% in January 2017.

So whilst Nationwide’s main competitors are reducing their rates, this makes the FlexDirect offering even more competitive, especially since the rate is fixed for the first 12 months. Currently we are not aware that Nationwide has any plans to reduce its rate, although they state their rates are constantly under review.

Fair Investment view

Commenting on the account, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company said; “The FlexDirect from Nationwide offers a market leading interest rate on balances up to £2,500, although the £1,000 you are required to pay in each month is at the higher end compared to other current accounts offering competitive interest rates. There is also no monthly account fee, so all of the interest earned goes straight into your pocket. Although the rate drops to 1% variable after the first 12 months, this is still considerably more than most other current accounts and on a par with some of the top instant access accounts currently on offer. With the Current Account Switch Guarantee running alongside, there really is no excuse to finding out more.

Santander still the top choice on larger balances

With effect from 1st November, Santander’s 1|2|3 account offers 1.50% AER variable on all balances up to £20,000. If you were to compare this with the best instant access accounts on offer, it would be a clear market leader, albeit with the cap on the amount you can earn interest on. You can also earn up to 3% cashback on selected household bills such as council tax, gas and electricity, broadband, mobile phones and more. You must pay in at least £500 per month and have at least two active direct debits to receive interest and cashback. There is also a £5 monthly account fee, which may be cancelled out if you make the most of the cashback on offer – their site has a simple calculator to help you work out how much cashback and interest you might earn, versus this monthly cost.

A note on the Personal Savings allowance

Remember that since the start of the current tax year (6th April 2016), most people receive a personal tax free allowance for interest earnings on savings. For basic rate taxpayers this is set at £1,000 each tax year, whilst higher rate taxpayers get an allowance of £500. Beyond these allowances, basic rate taxpayers will pay 20 percent on savings income and higher rate taxpayers pay 40 percent. Additional rate tax payers will not receive a personal allowance. Also note that income from ISAs does not count towards your Personal Savings Allowance (it’s already tax-free).

An important part to play for savers?

Even with the Personal Savings Allowance, there is no doubt that every penny counts in these days of record low rates, creeping inflation and economic pressures all round, and so the returns on offer from the best high interest current accounts cannot be ignored. 5% on £2,500 equates to £125. Our market leading instant access currently offers 1.0% and so you would need £12,500 in that account to achieve the same level of return. Although these are first and foremost current accounts, they also have every right to be considered amongst the range of options for savers.

7-Day Switch

Apart from the low interest rates generally on offer, one of the main reasons many of us have stayed with our current account provider far longer than other type of account, is the fear that something would go wrong with the direct debits associated with our account. However, since the introduction of the current account switch service in September 2013, the whole process of switching banks is easier and will now be completed in seven working days – the 7-Day Switch.

Over 40 banks have signed up to the service (including Nationwide and Santander), which makes sure that all outgoing payments, such as standing orders and direct debits, will be transferred across to your new bank on your behalf. The service also guarantees that should any incoming payments be sent to your old account in error, these will be automatically redirected to your new account for up to 36 months after your switch date. This means the banks do all the hard work for you, making switching smoother and faster.

To switch or not to switch?

The 7-Day Switch rules therefore offer peace of mind to anyone considering a switch from their current account provider. However, you don’t necessarily have to switch your current account – although Santander requires you to have at least two active direct debits, Nationwide does not and so if maximising interest is your top priority, you could also consider taking one of these accounts out in addition to your existing current account, thereby leaving everything you already have in place. You will of course have to make sure you pay in the minimum amount required each month in order to earn the level of interest on offer.

Could you get more from your current account?

Many existing accounts pay no interest at all, so with up to 5.0% available it is always worth comparing what the market has to offer. Staying put simply because you have all of your direct debits set up is no longer a valid reason, especially since the introduction of the current account switch guarantee (see below for further details). As a minimum, these accounts should be considered an important contributor to the overall returns from your savings.

 

Click here for more information on Nationwide’s FlexDirect account »

Click here for more information on TSB’s Current Plus account »

Click here for more information on Santander’s 1|2|3 account »

Click here to compare high interest current accounts »

 

Please note that all rates and charges quoted are subject to change.

Overdrafts are only open to customers aged 18 or over and are subject to approval.

AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Gross is the interest you will receive before tax is deducted.

When will interest rates rise and what does this mean for savers?

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As the Bank of England’s Monetary Policy Committee (MPC) has now held the base rate at 0.5% for over six and half years (the last vote was the 79th month in succession), we take a look at if there is any chance of a rise in sight and what the current outlook might mean for savers.

When will interest rates rise?

One committee member, Ian McCafferty, once again dissented from the other 8 members of the MPC and argued that the base rate should climb by 25 basis points (a quarter of a percent) to counteract any potential risk of inflation leaping beyond the 2% target in the medium term. However, despite Mr McCafferty’s dissension, most economists are still predicting that any rise in the base rate will not occur until early next year, a consensus predominantly based on beliefs that the UK’s growth will improve in its third quarter seeing price inflation rise gradually from the end of 2015.

Bleak outlook

Rather bleakly Bank of England Chief Economist Andy Haldane last month stated that “the case for raising UK interest rates in the current environment is, for me, some way from being made. One reason not to do so is that, were the downside risks I have previously discussed materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target.”

The International Monetary Fund (IMF) also warned at the end of its recent meeting in Lima that central banks risk another crash in the global economy if they do not continue to support growth with low interest rates. The future therefore remains uncertain although any interest rate rise, let alone a rise by more than 0.25 percent, seems very unlikely in the foreseeable future.

Latest inflation figures

The headline rate of UK inflation as measured by the Consumer Price Index (CPI) had been expected to remain at zero when official figures for September were released today (13/10/2015) however, the latest figures from the Office of National Statistics revealed a return to negative inflation as the rate fell to -0.1% today, the main contributors being a smaller than usual rise in the clothing prices and falling motor fuel prices. This will have a direct impact on the annual uprating of some benefits, of particular note the state second pension, which is linked to the September CPI rate.

Unemployment

The unemployment rate in the UK decreased to 5.5% from 5.6% in the previous period. Over the last 12 months employment levels are considerably higher with over 350,000 more in work than in the same time last year, signaling further strength of the labour market. The private sector’s annual pay growth has also risen and now exceeds 3%, however the Bank of England stated “Encouraging improvements in productivity growth have so far limited the impact of that pickup in pay growth on businesses’ overall costs, and therefore inflation.”

Short term view

In their latest report, the MPC stated the UK’s economic growth is experiencing a ‘gentle deceleration’ after peaking in 2014 and that it will ease back if the global economy weakens. However the central bank also reports that pressures in the UK’s labour market have been rising too slowly for inflation to return back to the 2% target, meaning it will likely stay below 1% until at least spring of next year.

Worst case scenario?

Against this economic backdrop, savers must consider that even when interest rates do begin to rise, will this in itself affect savings rates for the good? Certainly the traditional relationship between the Bank of England base rate and savings rates has been severed for some time and there is nothing in the economic outlook that suggests this will restored any time soon.

Savings rates in dire straits

Interest rates fell dramatically from when the Government’s Funding for Lending Scheme came into effect back in August 2012. This gave banks and building societies a cheap source of finance so they are not so reliant on savers to lend them money. Since then, banks and building societies have held a series of cuts to new savers and often, once they find themselves at the top of the best buy tables, they lower their rates to new savers as well.

Market snapshot

Despite the introduction of so called ‘challenger banks’ into the hunt for our hard earned cash, whilst the Bank of England base rate has remained unchanged at 0.5%, interest rates remain at shockingly low levels by historical standards, which continues to pose difficult questions for savers.

Headline returns on fixed rate bonds, the traditional mainstay for many savers’ portfolios, remain poor. Leading one year fixed rate bonds currently offer around 2.10%, two year fixed rates around 2.35%, three year fixed rates around 2.70% and around 3.10% if you can fix for five years. This means that many maturing bond holders are still looking at sizeable falls in income when considering taking out another bond of similar duration.

Savers in trouble

The result is that many have moved away from longer term fixed rates in favour of instant access or short term fixes on the basis that something will happen relatively soon which will then spur them on to take further action. Although understandable, the above economic snapshot highlights this could be a very dangerous strategy indeed.

Consider alternatives

There are a number of alternatives available to traditional fixed rate savings plans. Since the returns are not always guaranteed, these are not for everyone and are unlikely to be the home for your entire savings pot. However, they do offer the potential for higher returns and with the current outlook for savers looking set to create further challenges, could be a worthwhile and timely consideration. Like fixed rate bonds, your initial capital is protected and is eligible for FSCS compensation up to the normal savings limits.

Diversifying savings portfolios to include a wider range of options offers the potential to provide the level of returns savers may need over the longer term. Indeed, with the current spread of low savings rates on offer, this is the only way to attempt to mirror the yields of yester-year, previously offered by the more traditional savings plans.

Weigh up the options

Ultimately, which option or blend of options will depend entirely on your individual circumstances however, these remain unusual and challenging times and traditional savings accounts are currently falling short of meeting the pressures put on saver’s capital by the continuing economic situation. As a minimum we should make sure that all of the options available are weighed up very carefully indeed.

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No news, feature article or comment shou
ld be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice.