Prudent savers suffer

While homeowners and borrowers have been benefiting from dramatic interest rate drops over the past months, those with savings have been suffering.

The Bank of England yesterday highlighted savers’ plight with new figures revealing that banks and building societies are paying the lowest interest rates to savers on offer since official records began in 1995.

The report showed that instant-access savings accounts, ‘notice’ savings accounts and short-term savings bonds have all fallen below 1%.

According to the BoE, ‘the average return on instant access accounts slumped from 1.68% in November to 0.81% last month, while returns on notice-accounts and savings bonds slumped from 2.3% to 0.82%.  For cash Isas the average interest rate plummeted to 2/09% from 3.83%’. *

The figures reveal the extent to which savers are being penalised in the interests of boosting the housing market through repeated rate cuts throughout 2008.  However, with banks failing to pass on the rate drops to homebuyers – the best-buy variable rate mortgage products available are still hovering almost 3% higher than the 1.5% base rate – it seems like no one is winning.

As a response, the government is expected to reveal plans in the upcoming budget to help savers regain some income from savings despite the low interest rates, including abolishing income tax on savings for basic rate taxpayers, and raising the annual tax allowance for pensioners.

* Guardian.co.uk data.