It’s official: the savings market doesn’t work well for customers, especially if they are ‘loyal’ and longstanding customers. That’s the view of the financial regulator, the Financial Conduct Authority (FCA). It’s been investigating the savings market and it’s found that £160 billion is in savings accounts earning 0.5% or less. What’s likely to change and how can you get the best deal?
What’s wrong with savings accounts?
In its report FCA says that there are several major problems with the savings account market:
1. Savers find it difficult to know what interest rate their savings are getting, especially if they’ve had the same account for some time.
2. Savers are often put off from switching because they think it will be a hassle.
3. 80% of easy access savings accounts have not been switched in the last three years.
4. Money in older savings accounts earns less than money in newer accounts.
5. Banks that offer current accounts get the lion’s share of easy access savings accounts business, even though they don’t offer the most competitive rates.
What should change?
The regulator wants banks and building societies to give savers a better deal by:
– Being more transparent about how they cut the interest rate on old variable rate accounts. The bank or building society should be forced to prominently display the lowest interest rate that any of their customers get.
SAVVY TIP: I like this idea! If a bank is currently marketing an account paying 1.5% to new customers but is paying 0.01% to its loyal customers, it should tell you. And it should do this in letters as big as its ‘best buy’ rate.
– Giving savers clearer information to help them compare what they already have with alternative savings accounts — and make sure they know how to switch if they want to.
SAVVY TIP: The FCA was considering banning introductory bonus rates, but it’s decided not to because some customers like them. But banks will have to improve the way they tell their customers that the interest rate is about to drop or the bonus will expire.
– Making it easier for savers to manage accounts with different banks and building societies in one place.
– Making switching quicker and as easy as possible. The current switching time for cash ISAs of 15 days should also be cut.
Who has your savings?
The FCA study uncovered some interesting (to my mind!) information. It found that over 90% of adults have a savings account and there’s over £700 billion in savings accounts in all. Over 345 billion is in easy access accounts (so just under half at £160 billion is currently earning 0.5% interest or less).
– Around a third of the money in easy access savings accounts is from accounts opened five years ago or more.
– Currently there are 350 easy access accounts open and 1,000 easy access accounts that aren’t open to new customers, but which savers currently have money in.
– There’s currently little information being given to savers about alternative products.
– The four large current account banks (Barclays, HSBC, NatWest and Lloyds) pay less on their easy access savings than others. Yet they have the lion’s share of the easy access account market.
– In 2013, at least £160 billon was in easy access accounts paying 0.5% or less. In the vast majority of accounts (£145 billion worth), there was over £5,000 in the account.
SAVVY TIP: If you have £5,000 in an account paying 0.1% interest, you’ll earn £5 in interest after a year. If you move it to an account paying 1.4%, you’d have £70.
– Over half of accounts where there’s a bonus or teaser introductory interest rate were moved within 12 months of the bonus rate ending and over 75% within 24 months of the bonus rate ending.
Switching your account
If this has inspired you to switch your account, here are six simple steps that you need to take:
1. Check the interest rate you are currently earning on your savings. You can do this by going online and searching for the current interest rates, ringing the bank or building society or asking at your local branch.
2. Find out if there’s something else available that pays a better rate of interest. There are lots of different price comparison sites around. I like Moneyfacts.co.uk and Savingschampion (not a comparison site, more of a specialist savings site). Moneysavingexpert has lots of information about savings accounts as well as best buys.
3. If you’re switching a cash ISA, you must contact the new ISA provider first and transfer the money directly from your old ISA to the new one.
4. If you’re switching an ordinary savings account (ie not an ISA), you should close the account first. If it’s a notice account, you’ll have to give the bank or building society notice that you want to close the savings account (anything from 30 days to six months) or you’ll lose interest.
5. You’ll normally be able to take out the money you have in your account, but your bank or building society will send you any outstanding interest once they’ve calculated how much it is.
6. Open a new savings account with the bank or building society you want to switch to. You will need evidence of your identity, unless you already have a savings account or bank account with the provider.
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