Is this the end for high interest savings accounts?
It wasn’t so long ago that we saw UK banks advertising highest rates of up to 10% on their savings accounts – that almost rivalled the long term average rate of return offered by investing in the stock market, but with none of the associated risk. Those days seem far behind us now, with the Bank of England base rate currently at a miniscule 0.5%, the best savings rate you can hope for from a high street bank is the 4% (offered by the Halifax).
To add insult to injury, the few banks offering the best interest rates are placing tough restrictions on their savings account; the Halifax, for example, insist on regular monthly deposits and absolutely no withdrawals over the course of the year. Miss a payment or withdraw any amount and your account will be closed down.
Savings accounts now seem to have returned to their traditional status of the safe, boring option with a dismal rate of return which matches their low risk profile. Even the best rates on offer will barely be able to match the rising cost of living, so in effect your money in the bank is actually losing value.
You might ask why the government and the banking industry seems to want to discourage people from saving money; surely prudence is to be encouraged? Sadly not – the nature of the British economy has changed over the past decade or so, that it now depends heavily on consumer debt in order to keep growing. In short, the government (or more precisely, the big businesses which pull on the strings of government) need the public to keep spending more and more, which means they want you to borrow money, not save it. So, don’t expect savings accounts to offer a good return on your money any time soon.
Alternatives to high interest savings accounts
Unfortunately for savers, there’s no way to get the kind of returns that were available on accounts a year or so ago. Even if you put your money into a cash ISA, which is essentially a savings account where you don’t pay tax on the interest, you’ll still be lucky to get a return of 4%.
Index tracking ISAs, which link the value of your savings directly to the performance of the stock market, might have the potential to offer a much better return, although you do have to accept a significantly higher degree of risk. The stock market is extremely volatile at the moment and with many pundits arguing that stocks are likely to continue falling for a long time, this option really isn’t for the faint of heart.
You might find a more acceptable middle ground by putting your money in an ISA which invests in corporate bonds rather than stocks and shares. These are considered less risky than the stock market (although there is still a degree of risk attached) and they can offer a much better return than even the highest interest rates offered on today’s savings accounts.