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Could you benefit from a basic savings rate?

FCA proposes set rate across provider accounts

Banks should be forced to pay all customers a basic rate of interest on their savings, says the Financial Conduct Authority (FCA).

The proposal comes after the FCA concluded that its 2015 market review into cash savings failed to tackle price discrimination. 

Which? campaign Scrap the Savings Trap previously called for banks to help savers stuck in ‘zombie’ accounts paying substandard rates of interest.

We also wanted providers to display interest rates more prominently and make it quicker and less complicated to transfer Isas. The industry has since improved notifications about the end of bonus rates or fixed terms, and committed to faster cash Isa transfers (89% were completed within seven working days in 2017).

But, customers who stick with the same bank or building society for a long time are still being treated unfairly.

How would the basic savings rate (BSR) work?

Under the FCA’s proposal for a basic savings rate (BSR), firms would be banned from paying different interest rates to different customers based on the age of their account (aside from an initial period when a bonus interest rate can be offered).

The policy could boost total savings by around £300m a year, the FCA found.

Key features of the BSR proposal include:

  • All BSR balances have to be on the same rate, regardless of the age, channel of sale, account size, or any other characteristics.
  • There would be only one BSR per firm, rather than several for different easy access cash savings products.
  • Each firm would be free to choose the level of BSR and vary it over time.
  • Firms would still be free to offer introductory rates to new accounts, with no restrictions on the rates offered before they revert to the BSR.

Banks and building societies offering easy-access savings accounts or cash Isas have been invited to respond to the FCA’s discussion paper, along with industry and consumer groups, by 25 October.


Banks paying the worst rates

Banks often attract customers with ‘teaser rates’ that artificially boost the return for a short period, before reverting to a much lower rate.

Previous Which? investigations have revealed that many providers also dump customers into rollover accounts paying dismal rates after the fixed-rate period comes to an end. In April 2017, we found that three quarters of the accounts we looked at (35 out of a total 48) reverted to variable accounts paying as little as 0.01%.

Using Moneyfacts data, we’ve compiled a selection of variable accounts (both closed and open to new customers) paying the very worst rates, assuming a balance of £1,000:

Fixing the cash savings market

When we surveyed the general public (4,581) in July 2018, we found that 51% are put off from saving because interest rates are too low, and 62% are frustrated that current accounts pay better rates than most savings accounts.

The government has attempted to boost returns for savers through income tax regulation.

The personal savings allowance introduced in April 2016 means basic-rate taxpayers can earn £1,000 tax-free in interest from savings or current accounts. Higher-rate taxpayers are entitled to a smaller allowance of £500. However, we’ve found that 49% of the public are unaware of this allowance.

Three-quarters (74%) haven’t heard of the additional permitted subscription (APS) either, which enables married couples to pass on their Isa savings tax-free.

Efforts to make cash Isas more appealing continue to be undermined by most providers. In March 2018, we found that less than a third (31%) of cash Isas allow flexible withdrawals, and only one in five (20%) accept transfers from inherited Isas.

Will lifetime Isas be scrapped?

Lifetime Isas have also proved to be a flop. Some 41% of under 40s are entirely unaware of them, according to our July 2018 survey, and only one cash lifetime Isa currently available from Skipton BS (although Nottingham BS has said it would launch one later this summer). 

This new type of Isa, launched in April 2017, is available to adults under 40 and aimed at encouraging long-term saving for a first home or pension. However, the Treasury Committee has today called for them to be scrapped.

Baroness Ros Altmann has described the lifetime Isa as ‘another mis-selling scandal waiting to happen’, citing the unhelpful blurring of house purchase with pension and ‘wrong behavioural incentives’.

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