On Thursday 16th July, HM Treasury announced an update on National Savings & Investments (NS&Is) net financing target for 2020/2021, which has significant ramifications for the savings market. The key highlights of this are:
* NS&I now looks after £193.7bn of savings
* NS&I's net financing target for the year to 31st March 2021, increased to £35bn (with a range of £32bn - £38bn).
* £14.5bn net inflows in NS&Is first quarter (April to June 2020) - £19.9bn in, £6bn out (difference is interest/prizes)
NS&I has been in a group we refer to as the savings big 7 - Barclays, HSBC, Lloyds, Nationwide, NS&I, RBS and Santander hold approximately 75% of the savings balances in the market. Like for like comparisons are difficult to do mid year, as banks don't provide the kind of regular updates that NS&I do, it is likely that NS&I has now gone from being at the bottom of that group to being the second largest savings provider in the UK behind Lloyds Banking Group.
The net financing target is the amount of extra savings that NS&I is targeted to bring in by the Treasury. This is a net figure i.e. it is new money put in to NS&I accounts by savers, plus interest paid in to those accounts, minus monies withdrawn, interest paid away and prizes (paid to Premium Bond winners). The target previously had been £6bn so the move to £35bn is a six fold increase. NS&I is already huge but now it's got a mandate to get even bigger!
For much of the past decade, the best interest rates on savings have been paid by the wave of over 50 new entrants who have entered the savings market. Many of these have come from newly awarded banking licences (there has been 28 new licences in this time) but we have also seen takeovers of near dormant banks, which have then been relaunched, changes to existing banking licences to allow those banks to enter the savings market and international banks join the market. One of the frustrations for savers with these new entrants is that their best savings rates are often short lived. That's not because they aren't delighted to welcome the new savers who flood to them, but that they simply get overwhelmed with new cash which they ultimately need time to lend out. Therefore, they have to reduce rates or withdraw those products or risk the cost of carrying a vast excess of deposits which they can't lend out.
To illustrate the situation, the two new entrants who have the largest amount of savings are Metro (which has a network of branches) and Aldermore (which is an internet based bank without branches). Both are 10 years old. NS&I has grown its balances by £14.5bn in just the past three months whereas its taken Metro its entire history to achieve this and Aldermore has only just gone over £10bn.
Interest rates on savings accounts had been falling pre-Covid-19 but the coronavirus has accelerated this with the amount of lending by banks, and therefore the need for savings to fund this, falling sharply. We also saw a surge in repayment of debt by individuals during lockdown, Bank of England base rate fall to 0.10% and a new Term Funding Scheme introduced for banks - which offers them a cheaper source of funding for their lending than paying savers interest on their accounts costs. Consequently, interest rates have tumbled. Whereas Atom Bank topped the market for 1 Year at 1.65% at the start of March, BLME does so now at just 1%.
NS&I is now best buy for easy access type products on four accounts (Premium Bonds 1.40%, Income Bonds 1.15%, Direct Saver 1%, Direct ISA 0.90%) and, in my opinion, it is now propping up the savings market. These rates are stopping the collapse of pricing on savings products completely and means that I think pricing will hold at around the current levels.
Given this, rates are unlikely to move until NS&I cut their rates. It has increased its lead over competitors in recent weeks so I expect it's Q2 net financing to be stronger than its Q1. I predict it will be over £30bn up on the year by the end of its Q2. It has to give two month's notice of rate changes. Therefore, it looks likely that rate cuts will be announced in August or September, for implementation in October/November, to stem the inflows to avoid exceeding the top end of its range in its Q3 (October to December 2020). Early September announcement seems the most likely to me, with new rates coming in to effect for November.
During that time, we should see the likes of Zopa, Castle Trust, Oxbury, Vive and JN Bank, who have been awarded banking licences but are not yet live in the savings market, start to offer new products. While this will provide some price support, if NS&I do cut in the later stages of the year, their appetite collectively is only likely to be £1 - £2bn in a quarter. This won't fill the gap so expect any rate cuts by NS&I to trigger further falls in savings pricing.
The savings market is probably the most volatile I have seen it in the 12 years I've been in the market. Rates are changing on a daily basis and often what feels like an hourly basis, as providers race to respond to movements from competitors. Here's our round up of the key movements last week and my predictions for the week ahead.
Last week saw another wave of rate cuts in the savings market. Here's a summary of the key changes impacting our best buy tables:
* BLME cut their best buy 1 Year rate from 1.25% to 1% and their 18 month rate was reduced by 0.15% to 1.15%
* Charter Savings withdrew their 1 Year 1.11% rate on Monday, replacing it later in the week with a 0.90% version and similarly their 1 Year ISA went from 0.95% to 0.75%
* Gatehouse Bank cut rates across their entire fixed rate bond range and their fixed rate ISA range
* Ikano Bank took 0.20% off their 1, 2, 3 and 5 Year fixed rates
* Investec Bank withdrew their 1, 18 Month, 2 and 3 Year Fixed Rates from sale
* Marcus by Goldman Sachs closed their online saver to new customers
* Paragon Bank reduced pricing on their fixed rates and ISA fixed rates as well as withdrawing their 40 and 120 Day Notice accounts from sale
* RCI cut its easy access rate from 1.05% to 0.90%
* Secure Trust Bank pulled their 60 day notice account from sale
* Shawbrook Bank cut 0.50% from their 120 Day Notice account
* Smartsave withdrew their 1, 2 and 3 Year fixed rates from sale
The only positive moves was the return of PCF Bank with a 1.12% 1 Year and a 1.26% 2 Year rate, although the 1 Year was withdrawn from sale on Friday evening, and Marcus entering the market with a new 1 Year. Priced at 1%, Marcus is unlikely to see a flood of new money but, the way the market is moving, we may well see that move up the tables quickly.
Looking ahead, I can't see much good news this week. With the movements of the past two weeks, Al Rayan Bank have moved to the top of the many best buy categories, having barely featured prior to that. Expect this to trigger cuts from them towards the end of this week. Atom Bank, having already cut rates twice in as many weeks, will be forced in to a third cut to their 1.15% 1 Year rate. Their 2 Year rate at 1.25% is moving up the tables too and I suspect this to get trimmed also. Reductions or withdrawals are also likely from PCF and Shawbrook's 2 Year rates.
Two weeks ago we had a cluster of banks paying around 1.50 - 1.60% for 5 Year money and I wrote then that I expected this to be enough to hold a headline rate around that level. All have withdrawn or cut rates and BLME's 1.60% rate is now 0.20% clear of nearest rivals RCI and UBL. I can't see this lasting and imagine BLME will have their eye on a cut to this later this week, and astonishing as it is to say this, we will see 5 Year pricing consolidate in the range from 1.30 - 1.40%. With NS&I paying 1.16% on their no notice Income Bonds, this leaves a staggeringly small margin between easy access and 5 Year and I can't see anything changing that in the short term.
I'm afraid it's set to be another week of falling rates for savers as we continue to wait for the bottom of the market. My advice to savers is secure the best rates as soon as you can.
A new money saving app, Snoop, has launched with the aim of helping us to save up to £1,500 per year.
Each month, James writes in Essex lifestyle magazine, BeauLieu. This is a reproduction of his April 2020 column.
James writes a monthly savings column for Essex based magazines, Beaulieu and Channels. This is a reproduction of his July column.
Last month I wrote about the steep falls in interest rates we have seen on savings during the Covid-19 lockdown period. Although rates are continuing to fall, the number of cuts is reducing. This is because the government’s savings provider, National Savings & Investments (NS&I), is providing some support to the market with its Income Bonds paying 1.16%, Direct Saver at 1% and easy access ISA offering 0.90%.
I did wonder whether the recent mini-budget might see an announcement of a cut to NS&I’s rates, given their best buy status, but thankfully it didn’t. Given they have to give two months’ notice of changes to rates, this means we are some time off seeing a rate cut at NS&I.
We are now seeing some new product launches – Allica Bank have come back to the market with some very excellent notice, 1 and 2 Year Fixed Rates and Close Brothers similarly have launched competitive 2 and 3 Year rates. We also (very briefly) saw Wesleyan Bank launch a best buy 5 Year fixed and well-priced 18 month bond.
My advice to savers is to grab these rates as soon as you can because, in volatile markets like these, they are unlikely to last. Providers will move in and out of the market quickly so secure them while you can. Remember, many allow a 14 day funding window, so you don’t need to have access to the money you want to save in those accounts there and then.
New banks close to launch
I expect to see some new entrants come into the savings market soon. Zopa have launched a range of fixed rate savings to their existing investors but expect those to be offered more widely – possibly later this month. The newest bank, Castle Trust, have also indicated they will enter the savings market later in July.
JN Bank, Oxbury and Vive Bank all received their banking licences earlier in the year so expect to see them come to the market too – probably in the autumn.
Every new entrant to the savings market has paid attractive rates initially to get a foothold so look out for these new players to see if they launch with some good offers to entice new savers. As they are new, all are likely to only be able to accept a limited amount of savings though so don’t expect good deals to last long!
Why savers should consider notice accounts
When interest rates are falling quickly, notice accounts can be a really good option for savers. The reason for this is because the bank providing them needs to provider savers with at least the equivalent notice period before changing rates. For example, if a bank has a 95 day notice account, if it wants to change the rate on this, it needs to give its savers at least 95 days’ notice of the change, before the rate can be reduced.
Not all banks are good at keeping on top of what is known as their ‘back book’ so often such changes are not implemented particularly quickly, or not at all, meaning that savers benefit. An example of this is BLME who are still paying 1.71% on their first 90 day notice account and 1.51% on their second one. Their current version paying 1.10% is still joint top of market and, based on past performance, doesn’t look like it will get changed quickly if rates fall.
ICICI Bank are currently paying 1.40% on their 95 day notice account. Although they have already announced a cut to 1.10% with effect from 1st September, new savers will still get the higher rate until then and 1.10% is still joint top of market.
New bank Allica is also paying 1.10% and could also be worth a look for similar reasons. While these accounts aren’t immune from falling rates, they are often forgotten and, even if they are cut, the delay involved in reducing the interest rate softens the blow somewhat for savers.
Children’s savings accounts still paying great rates
One area which has seen limited impact from rate cuts is children’s accounts. There are still some fantastic rates to be found if you are saving for your children. Halifax lead the way with a 4% paying regular savings account which as little as £10 per month can be put away in to, up to £100 per month.
Saffron Building Society has long been a great home for children’s savings, and their current regular saver pays 3.02% with a £5 per month minimum saving level and £100 maximum.
NS&I (3.25%) and Coventry (2.95%) lead the way on Junior ISAs, with NS&I only available online whereas Coventry is a branch, post and telephone based account. Both accounts can be opened with just £1 and can be added to as and when.
The word 'unprecedented' has been overused in the past two months but these are truly extraordinary times in the savings market. The last couple of days of last week saw some truly remarkable activity in the savings market with a host of providers changing rates. Other than PCF Bank relaunching their 3 Year Fixed Rate, all the pricing movement was downwards. Here's a summary, by product category, of the changes, to put some context to their sheer volume of rates which have been cut:
* Aldermore cut their rate from 1% to 0.80%
* Shawbrook reduce from 1% to 0.75%
* Close withdraw their 95 day notice 1.35%
* Paragon reduce their 120 Day notice from 1.20% to 1.05% and 45 day notice from 1.10% to 1%
* Gatehouse Bank drop their best buy 1.50% to 1.25%
* Hodge Bank cut from 1.34% to 1.20%
* Ikano reduce from 1.36% to 1.21%
* Paragon drop from 1.25% to 1.10%
* Zenith Bank reduce from 1.43% to 1.15%
* SmartSave cut from 1.40% to 1.35%
* Gatehouse drops from 1.60% to 1.35%
* Hodge Bank cut to 1.25%
* Ikano drop from 1.46% to 1.31%
* Paragon reduce from 1.40% to 1.25%
* Shawbrook reduce to 1.25%
* Zenith Bank cut from 1.53% to 1.30%
* SmartSave cut from 1.45% to 1.40%
* Gatehouse reduce their best buy from 1.75% to 1.45%
* Hodge Bank cut to 1.30%
* Ikano drop from 1.56% to 1.41%
* Paragon reduce from 1.50% to 1.30%
* PCF relaunch at 1.50%
* Shawbrook Bank reduce from 1.68% to 1.30%
* Zenith Bank cut from 1.57% to 1.40%
* Gatehouse reduce their best buy from 1.85% to 1.55%
* Ikano drop from 1.71% to 1.56%
* Paragon cut from 1.60% to 1.40%
On top of this, Charter Savings, Gatehouse, Hampshire and Principality all cut or withdrew ISA rates too. Of the ten providers in our 1 Year table, only Atom Bank and BLME (Bank of London & Middle East) remain as they were. All other providers have either cut been promoted in to the tables due to the rate changes.
There are a number of reasons why this is happening. There's been a drop in lending activity which these savings book fund, the new TFSME (Term Funding Scheme for Small & Medium Enterprises) has started to be drawn on by some banks and the Bank of England Base Rate has been cut. However, fundamentally, we are now in a vicious circle where providers are cutting in response to other movements, which then triggers other banks to respond, to avoid getting over liquid with savings. The upshot is, everyone moves! That's ultimately where we got to at the back end of last week where it was possible to see that both the timing of the change, and the rates being moved from/to, in many cases were clearly a reaction not a scheduled change.
The question which savers want to know is where is it going to end. Longer term, that's incredibly hard to predict but short term it is very clear. We are in for more of the same. However, there will be a floor and government owned National Savings & Investments is going to provide that floor. It had a round of planned rate cuts which were due to take place on 1st May. They were pulled in light of Covid-19 and this has now seen their Direct Saver (1%) enter the easy access best buys and, if you class their monthly interest paying Income Bonds (1.16%) as an easy access account, Income Bonds top it.
NS&I works differently to banks and this is going to provide the floor to stop further falls in the short term. In easy access, I expect the position to remain broadly as it is with best buy rates around 1%. For 1 Year Bonds, I expect a fall back towards 1.20 - 1.25%, 2 Year around 1.35%, 3 Year at 1.45% - 1.50% and 5 Year around 1.60%. NS&I don't have a regular scheduled date to review rates so it is impossible to know when they will recommend reductions but, they give two months notice of changes to rates so we are looking at August at the earliest for any cuts. While I expect there will still be much movement and jostling for position, I don't foresee the headline rates changing significantly i.e. the providers may change but expect those best buy rate levels to hold, regardless of which provider is paying those rates.
What do I expect to happen next? BLME now sit top of all bar 5 Year Fixed Rate Bonds so I expect a re-price of their range, in response to the changes. Atom's 1 Year at 1.40% looks unsustainable and I expect that to be cut by the end of the week, by at least 0.15%. Wyelands can also not maintain their 1.30% price point and will cut too and expect Habib Zurich to make yet another cut to their 1 Year too. I don't think we will see anything near Atom's 1.40% or BLME's 1.45% anytime soon so 1 Year savers should secure those while they can.
RCI's 5 Year rate of 1.80% is a historical low for 5 Year savings but this current best buy pricing will look generous by the end of next month. While I cannot recommend locking away money at that price for 5 Years, it will look very competitive to what will be there in the coming weeks.
There will be more volatility in the coming days and weeks but this will stabilise as rates settle around these price points. My advice to savers is secure these rates while you can.
Marcus by Goldman Sachs have announced a cut of 0.10% to their best buy easy access account this morning. Hot on heals of its 2020 Q1 results announcement, which showed it has grown to over 500,000 savers in the UK with balances totalling more than £17bn, the bank cut its rate to new customers to 1.20%. Existing customers received notification that the rate on their accounts will reduce to 1.20% from 7th May.
Kent Reliance cut its own easy access rate from 1.20% to 1% this morning too, ahead of the change from Marcus, and Paragon have cut their 1.21% rate to 1% for new customers. These moves all follow Virgin Money's pull back from its best buy of 1.31% to 1.01% last week, in what has been a bonfire of rate cuts for easy access savers.
Ford Money were due to relaunch their flexible saver this morning, but this was pulled however not before coverage of the move appeared alongside the Marcus cut. Its reentry to market will have been welcomed by savers, but the move is understandable in light of competitor pricing movements.
All eyes are on Aldermore Bank now, who sit top of the easy access tables with their 1.25% rate. Although Aldermore, which launched in 2009, now looks after over £10bn of savers deposits, we don't anticipate that it will hold this position for long and expect it to pull back by the end of next week. Savers likely have a short window of opportunity to secure this rate as we expect any new issue to be priced around 1.15 - 1.20%.
With Marcus, Saga, RCI and Investec all priced at 1.20%, and Shawbrook tucked in behind at 1.15%, there's some support at this price level. If Aldermore do drop in to that range and Ford Money re-enter the market, this will further bolster this. However, there's precious little between this and a clutch of providers priced around 1%. Any further downwards movements from this group is likely to trigger further falls towards 1%.
What will be interesting to see is if these price falls trigger a renewed interest in cash ISAs, which have waned in popularity with the advent of the personal savings allowance and pricing typically being lower than their ordinary counterparts. However, with Shawbrook Bank, Bath and Penrith Building Societies all paying 1.25%, easy access cash ISAs now look a much better bet for savers.
In normal circumstances, savers have a keen interest in the budget. Will there be new schemes or incentives to save? Will Individual Savings Accounts (ISA) or Personal Savings Allowances be increased? What does the Treasury have in store for National Savings & Investments and will that be good/bad news?
Rishi Sunak’s first budget as Chancellor of the Exchequer was possibly the most underwhelming for savers in recent memory. In fact, other than a (pretty significant in fairness) increase in the Junior ISA allowance from £4,368 to £9,000 buried in section 1.171 on page 51 of the Budget 2020, there was nothing.
The real news for savers had already come earlier in the morning from the Bank of England, in a package of measures to support the economy in the wake of Covid-19. These were three-fold:
1) Reducing the Bank of England Base Rate from 0.75% to 0.25%
2) Launching a new Term Funding Scheme (TFS)
3) Releasing the UK Countercyclical Capital Buffer
None of these moves were good news for savers. Firstly, although interest rates on savings have long decoupled from base rate, a half a percent cut in base rate isn’t going to do anything to increase rates on savings.
Secondly, the Term Funding Scheme has been launched to provide ‘in excess of £100bn’ to banks in term funding to support small and medium sized enterprises (SMEs). It’s a move the Bank of England has made recognising that there’s little scope for banks and building societies to reduce rates on savings much further so is designed to provide them with cheap money to lend to SME’s.
The jury is out on whether previous schemes have helped UK business significantly or have been used to provide banks with cheaper funding for loans they may well have largely made any way. Many personal finance commentators blame the previous TFS and its predecessor, the Funding for Lending Scheme (FLS), for poor savings rates. While they undoubtedly didn’t help savers, I don’t believe they are solely to blame for the rates on offer to savers. What’s clear though is that the new TFS isn’t going to give banks any incentive to increase rates on deposits.
Thirdly, releasing the countercyclical capital buffer will free up to £190bn to banks to lend to businesses. This is money that banks won’t now need to attract from savers and is significant as this figure represents circa 11% of the £1.7tn UK savings market.
All in all, not much to cheer about. Unfortunately, looking ahead, the news doesn’t get better for savers. What has held savings rates higher than they otherwise would have been, is the flood of new entrants to the market, who have offered best buy rates to gain a foothold. This has also forced other smaller providers and new entrants to compete on interest rates to attract savers. While savers might bemoan rates, they’d be much lower were it not for the plethora of new entrants that the market has seen.
Over 20 new bank licences have been issued, and approximately 50 new savings providers in total have joined the market in the past decade. While new licences have been thin on the ground recently, there’s an influx coming. Allica, Oxbury, revverbank, Vive and Zopa are all licensed but yet to launch to the market. B-north, Castle Trust, Distribution Finance Capital, Lintel and Recognise are known to have submitted their licence applications and expecting to gain authorisation in Q2 2020 and there are more that I can’t name.
In theory, this should be good news for savers – new banks paying attractive rates to bring in savers. In reality, Covid-19 is likely to delay the launches of some, as teams are forced to work from home. It could well impact on the ability of those prospective new banks seeking capital to fund them through to launch and profitability – both by making investors more cautious and more practically by impacting management teams being able to meet investors. Brexit certainly slowed the pace of authorisations and Covid-19 could well impact the Bank of England’s New Bank Start Up unit too.
In the past week, the savings market has lost best buy rates from Bank of London & Middle East, Ford Money, Habib, Ikano and United Trust Bank. It’s hard not to see that trend continuing and a further fall bank in rates to come.
With global stock markets turbulent, we may see more money move from equity investments into cash savings, which will do little to help rates, as history shows that investors behave irrationally in times of volatility i.e. selling at market low points.
There are few glimmers of hope but those looking for signs of optimism will have been buoyed by Smartsave Bank bucking the trend and launching a best buy 1 Year Fixed Rate Bond. I’m also in the school of thought that rates are at such a point that there’s limited room to fall much further. While I expect some pull back from these levels, I’m not expecting drops in line with those witnessed in the FTSE in recent weeks. Finally, despite the influx of new entrants there’s still considerable interest from prospective new banks and I think the market has a way to go. If we can get past Covid-19 in the next few months, there’s hope for savers later in the year.
Stay safe savers.
James writes a monthly savings column for Essex based magazines, Beaulieu and Channels. This is his column from their June magazines, which was published late in the month after lockdown restrictions for Covid-19 were eased.
It’s great to be back writing my column again after the enforced break due to Covid-19. The world has changed so much in the past three months and the savings market has been no different.
Prior to lockdown, it was still possible to get 1.31% on an easy access account, 1.65% on a 1 Year Fixed Rate and 2% on a 5 Year. Now there are only 2 different providers paying 1% or more on easy access, a half a dozen providers paying more than 1% on 1 Year Fixed Rates and only BLME is paying over 1.40% on 5 Year money.
Why are rates falling so sharply?
There are a number of reasons for this. The amount of lending that banks are doing, which your savings are used to fund, has dropped substantially. The property market ground to a complete halt and, while many people have suffered financially due to the lockdown, there are others who have found themselves with more money than before. Many of them have paid off loans and credit card debts, further reducing the amount of money banks are lending.
The government has also opened up a new Term Funding Scheme for Small & Medium Enterprises (TFSME) which, in short, is giving banks a cheap source of funding to help support lending to SMEs.
The volatility of the stock market has led many investors to move money into savings and the Bank of England has reduced its base rate from 0.75% to 0.25% then again to 0.10%. All in all, a recipe for the low savings rates that we are seeing currently.
NS&I top the tables
There have been few rays of sunshine for savers, but one has been the cancellation of planned rate cuts by the government backed National Savings & Investments. A raft of interest rate reductions planned for May were cancelled, much to the relief of its 25 million savers.
NS&I looks after £167bn of savings and is one of the largest savings providers in the UK, alongside the ‘big 4’ banks (Barclays, HSBC, Lloyds and RBS), Nationwide and Santander. While those compatriots have barely been near a best buy table for savings in the past decade, NS&I now finds itself top of some.
Its ‘Income Bonds,’ which start at £500 and don’t require any notice to access, pay a table topping 1.16% and its Direct Saver, which can be opened with just £1, pays a next best 1%. Their easy access ISA (0.90%) is only beaten by Al Rayan and the Premium Bonds prize pool is 1.40%.
As NS&I is government backed, all savings with it are 100% protected and risk free. Also, their terms and conditions require 2 months’ notice to change the rate. While this isn’t a long guarantee, it does give a degree of protection on any potential rate reductions and enough notice to look for other options.
Is there any other good news?
Forecasting the market is tricky but I think we are in for more rate cuts sadly. Based on the current economic and coronavirus outlook, I think we will see further falls but I do feel we are reaching the bottom of the market.
My advice is not to tie up your money longer than a 1 Year Fixed Rate and to take any good rates that may come out for that term as soon as you can as we are seeing products launched and withdrawn in a matter of a few days, and rate changes are a daily occurrence and sometimes it feels like its hourly!
Regular savings pay the best rates
One product that is definitely worth considering, particularly those who have extra monthly income they aren’t used to, is to look at regular savings accounts. HSBC, M&S Bank and first direct all pay 2.75% on their monthly regular savers to existing customers. Halifax, Kent Reliance and West Brom Building Society all pay 2% to existing and new customers. Halifax allows up to £250 per month to be saved and Kent Reliance £500 per month.
That’s all for this month. As always, we love to hear your feedback so please let us know if there’s topics you’d like me to cover in future months.
After the high-water point of 2017, the market has been relatively starved of new entrant banks. That’s all about to change with 2020 poised to be a record-breaking year for authorisations and launches. James Blower takes us through the runners and riders.
Allica Bank has become the latest entrant to the savings market and the first to launch in 2020, having quietly launched its first product yesterday.
Each month, James writes in Essex lifestyle magazine, BeauLieu. This is a reproduction of his March 2020 column.