Brexit, inflation and rate reductions – it has been another tough year for savers, but there have been a few bright spots along the way.
After two years of rising inflation, the cost of living started to fall in the second half of the year, making it easier for savers to earn real-world interest on their funds. And while interest rates remained stubbornly low, the arrival of Marcus Bank and its 1.5 per cent interest rates promised to shake up the savings market for good.
Meanwhile, regulators are finally paying attention to the issues faced by UK consumers, issuing calls for a minimum savings rate, and cracking down on banks which fail to offer their best rates to long-term customers.
All of this suggests that 2019 could be the year when savers are finally rewarded for their patience. Unless, of course, Brexit upturns the savings landscape once again.
But before the New Year is upon us, lets look back on the biggest developments of 2018 and how they have affected your savings.
The Consumer Price Index (CPI) measures the changing cost of living on a month-by-month basis. All year the CPI has been above the Bank of England’s target rate of two per cent, while the vast majority of savings accounts were offering returns of one per cent or less. This meant that many savers had to watch their money lose value while the CPI rose as high as 2.7 per cent.
However, in the last few months of the year, the rate of inflation fell slightly thanks to lower oil prices (which had a knock-on effect on the cost of petrol and central heating) and gradual wage growth.
By the end of the year, inflation was at a 20-month low of 2.3 per cent, edging closer to the Bank of England’s target, and boosting household budgets in time for the holidays.
At the end of 2017, the Bank of England’s Monetary Policy Committee (MPC) increased the base rate for the first time in more than a year, after it hit an all-time low of 0.25 per cent in the wake of the Brexit vote.
Despite numerous predictions that a slew of rate rises would follow in 2018, in the end the MPC opted to raise the base rate only once – from 0.5 per cent to 0.75 per cent.
Some banks were quick to pass on these higher rates to savers, while others appeared to be waiting for further rate rises before altering their own offers. But another rate rise never came, with the MPC citing slow economic growth and Brexit-related uncertainty among the reasons to remain cautious.
Goldman Sachs launched its first-ever UK-based retail bank in September, and it arrived with a bang. Marcus Bank (named after Goldman Sachs founder Marcus Goldman) debuted an instant-access cash savings account which paid 1.5 per cent, immediately placing it at the top of the savings charts.
Within ten days of the launch, more than 50,000 savers had opened an account with the bank. This sparked action among the UK’s other retail banks, with both West Brom Building Society and Virgin Money rushing to match Marcus’ 1.5 per cent rate.
Others simply found that they were unable to afford to offer such competitive rates – Nottingham Building Society was quick to offer a 1.55 per cent easy-access rate to its customers, but it was forced to pull the deal after just 48 hours due to “unprecedented demand”.
National Savings & Investments (NS&I) has always been viewed as a safe haven for conservative savers. Not only are all deposits guaranteed by the government, but the rates on offer for short-term bonds and fixed-rate accounts were often more competitive than most High Street banks.
But as the economy weakened, NS&I was put under increasing pressure to deliver value for the government. This meant introducing a series of restrictions and rate reductions across 2018, which were designed to discourage over-investment.
In March, NS&I cut the rates on two of its most popular bond products. The three-year Guaranteed Growth Bond was reduced from 2.2 per cent to 1.95 per cent, while the three-year Guaranteed Income Bonds were cut to 1.9 per cent, down from 2.15 per cent previously.
Over the summer, NS&I reduced its maximum deposit limits from £1m to just £10,000 and slashed the rate on its Direct ISA product from one per cent to 0.75 per cent.
Then, in a final blow for savers, the Treasury-owned bank announced that it will base its index-linked savings bonds on the CPI as of May 2019. Previously, these bonds had been linked to the higher Retail Price Index, or RPI.
In an unprecedented move, the Competition and Markets Authority (CMA) accepted a ‘super-complaint’ from Citizens Advice, which claimed that UK banks and service providers were routinely penalising loyal customers to the tune of £4bn per year. Long-term savers were found to have missed out on £1.1bn due to low interest rates and hidden account fees.
In its official response to the super-complaint, the CMA criticised retail banks for their “continual year-on-year stealth price rises; costly exit fees; time-consuming and difficult processes to cancel contracts or switch to new providers; and requiring customers to auto-renew or not giving sufficient warning their contract will be rolled over.”
The CMA has since backed a recent proposal from the Financial Conduct Authority (FCA) to set a minimum savings rate as a way of protecting consumers from the effects of rising inflation and low interest rates.