Six months on, Andrew Hagger of Moneycomms.co.uk looks at the impact the Funding for Lending scheme has had on UK savers.
On 1st August last year the Government’s Funding for Lending scheme was launched with the aim of providing cheaper loans and mortgages to individuals and businesses.
Six months on, there’s no doubt that mortgage rates have fallen as planned, but the side effects of this initiative have been nothing short of disastrous for UK savers.
Barely a day goes by without the launch of another record low mortgage deal, only last week we saw HSBC offering a 2 year fixed rate at 1.98% and Tesco Bank just 2.89% fixed for 5 years.
But while homeowners are eagerly filling their boots and remortgaging to ultra-cheap home loans, savers have watched in vain as a huge chunk of their interest income has been wiped out.
We are continually being reminded of the need to put money aside for our retirement but if the incentive to save for the short term is eroded, it’s going to have a knock on effect on long term savings too.
So far the government has seemingly turned a blind eye to the plight of savers who have seen rates fall by up to 35 per cent in the last half year.
It makes you wonder if this is what ministers wanted to happen, hoping some people would be so frustrated with the meagre returns on offer that they’d give up on saving and start spending instead – thus giving the economy a much needed shot in the arm.
For those who rely on savings interest to boost their pension income it’s a massive problem as they are facing higher energy, food and fuel costs on a much reduced income. For some savers this will leave them with no alternative but to use some of their capital just to make ends meet, but this strategy will only work for a limited period until their nest egg is exhausted – and then what?
Last August you could have earned 3.19% on an instant access savings account, the best is now just 2.00%, similarly with fixed rate savings bonds, six months ago you would have got 3.50% for 1 year and 4.50% for 5 years; those rates have since slumped to just 2.25% and 3.10% respectively.
Even those looking to shelter their cash in tax free savings aren’t immune to the savings meltdown where it’s no longer possible to get an ISA paying more than 3.00 per cent, whereas last August it was possible to achieve 4.15 per cent.
When you do the sums and work out what this means in real cash terms for savers it’s easy to understand how some people are struggling to keep pace with the increasing cost of living.
A couple with a nest egg of £50,000 in a 1 year fixed rate bond could have earned £146 per month before tax last August but now the very best deal available will only bring in £93 per month which works out at £636 less over the course of a year.
With experts predicting that inflation is more likely to increase rather than fall back within the 2 per cent target figure, the hardship for many people is likely to increase.
The Funding for Lending scheme is due to run for a term of 18 months, but if the first six months of this experiment are a sign of what’s to come, it’s time to consider a plan b – and quick.
- Where next for NS&I customers? - October 23, 2020
- Fixed rate savings – best buy rates edging upwards - September 17, 2020
- 0% Credit Card Balance Transfer terms on the slide since lockdown - July 13, 2020