In the boom times a few years ago, when savers could expect to earn from savings accounts interest rates exceeding 7% on short term fixed rate bonds, everybody wanted a piece of the action. Little did they realise that by locking in on a rate for several years, they would out-do any other savings product on the market.
Nowadays, we’re seeing the opposite side of the coin, with rates at their lowest level ever recorded, which means that rates offered to savers are also down.
Despite the best returns currently being offered on fixed rate bonds, many people are holding off in the hope that the Bank of England will increase the base rate, which would effectively be passed on to savings accounts.
However, short term bonds are becoming increasingly popular among savers and by fixing your term to just one year, you are unlikely to miss out on much if the base rate increases.
Anyone that is looking to apply for any savings account, whether it is a standard savings account, ISA or bond, or currently has funds in an account, should keep an eye on the rates on the account. This is because,much like credit cards, most savings accounts offer introductory bonus rates that last for 12 months, so once this period is up your rate will fall significantly.
Switching accounts is easy and will not cost you a thing, so it’s important to stay aware of your accounts.
This Christmas is expected to see record spending levels, despite the freezing weather that hit the UK earlier in the month
Barclays recently released figures predicting a record £48.9 billion spend over the Christmas period - an 8% increase from last year.
The final shopping days before Christmas are expected to be exceptionally busy as freezing weather and snow caused many to hold off shopping trips in recent weeks.
December 23rd is predicted to be the busiest day for debit and credit cards spending, with estimations exceeding £1 billion.
Meanwhile, ATM use is expected to peak on Christmas eve, with withdrawal rates amounting to around £88 million at a rate of more than £24,000 a second as shoppers raid there savings accounts for any last minute purchases - thus losing out on their savings accounts interest.
In total, around £30 billion will be spent throughout December, and despite the snowy weather seen earlier this month, the majority of Christmas spending is expected to take place on the high street, with online purchases accounting for just over a quarter of all debit card spending.
High spending levels are set to continue in the final days of 2010 as people go in search of an early bargain during the extra bank holiday. Other savvy shoppers are likely to be making any big purchases before the year is out to avoid the VAT rise which will apply from early January.
London will see the busiest crowds this month, with the likes of Oxford Street and Westfield taking more than £5 billion in sales throughout December alone.
Dan Wass, Director of Current Accounts at Barclays said: “The early snow falls this month meant that the start of December was a little quieter on the high street than expected. This is likely to put even greater pressure on retailers as we draw to the end of the Christmas countdown, with customers being forced to do their shopping at the last minute.
We urge customers to stay safe in busy areas and encourage them to use their debit cards rather than carrying large amounts of cash. Nearly all shops, restaurants, bars and online companies accept debit cards so it is the easiest way to get your Christmas spending done quickly and securely. We would remind customers to take care of their card and their PIN, especially when using their PIN in crowded places.
Budgeting is also essential - customers can use Barclays mobile banking to keep track of their balance whilst they are out shopping. They can also sign up to weekly text alerts for a mini-statement of their bank account.”
According to travel money expert International Currency Exchange (ICE), people looking to go abroad this year for a Christmas break should think about making a visit to the Eurozone.
Whether you fancy skiing or a festive shopping trip to the Christmas markets, you should expect to get around 30 Euros on every £500 you exchange thanks to a 5.8% rise in the value of the Pound against the Euro since December last year.
The Euro is one of the few foreign currencies that has dropped in value year on year against the pound, which has risen above the likes of popular winter sun destinations such as Mexico, Thailand and Australia both in value and sales volumes.
However, even with the cultural delights of Europe on Britain’s doorstep, our love of long haul holidays has failed to be tainted by the poor performance of the Pound.
ICE saw a 30% increase in the sales of Australian Dollars compared to October, which has admittedly been influenced by cricket fans heading to Australia to see the Ashes. Figures have show that the Aussie Dollar is now the third most ordered currency from ICE, despite an 11% increase against the pound.
According to ICE, the Pound also fell against the Mexican Peso by almost 12% year on year and despite strong sales of the Thai Baht for this ever popular winter destination – which is currently 4th in the ICE currency chart, Brits are getting 16% less for their pounds compared to last year.
Joanna Williams, Head of Marketing for ICE said: “Many Brits can’t wait to get away at Christmas and New Year, in fact in a snap survey of our customers 62% said they were planning a trip abroad during the holiday season.
Fortunately this appetite for winter sun and ski holidays doesn’t seem to be diminished by the less favourable exchange rates we are seeing compared to last year. It just makes it all the more important for travellers to plan ahead and shop around for competitive exchange rates online and in specialist foreign exchange bureaux.”
This is the dilemma that many consumers face when rates are low.
The deputy governor of the Bank of England says that low interest rates should encourage savers to go out and spend from their savings accounts in order to help kick-start the economy.
Charlie Bean, a member of the committee that determine the Bank rate, advised savers to “eat into” the capital they have built up throughout periods of low rates - now being as good a time as any, as the Bank rate has been at a record low of 0.5% since March 2009.
He commented to Channel 4 news: “What we are trying to do by our policy is encourage more spending, ideally we would like to see that in the form of more business spending”.
“But part of the mechanism that might encourage that is having more household spending so in the short term we want to see households not saving more but spending more.”
He added that savers benefited from significantly higher rates in the past and could now eat into some of their capital while rates remain low.
But is this good advice? Take a look at two opposing views.
Spend Spend Spend:
Vicky Redwood, senior UK economist at Capital Economics, says:
“Charlie Bean has been criticised for suggesting that consumers may need to dip into their savings in order to spend more.
“But that is exactly what lower savings accounts interest rates and looser monetary policy is designed to encourage. Lower interest rates reduce the returns on saving and hence increase the incentive to spend - with higher consumer spending then boosting overall economic activity.
“Indeed, data released this week by the Office for National Statistics showed that without a sharp drop in household saving in the second quarter, the drop in households’ incomes would have fed directly through to a sharp drop in their spending - and potentially prompted the economy to slip back into recession.
“Of course, in the longer-run, households need to save more and borrow less - as I am sure Charlie Bean would agree.
“But right now, with the recovery faltering, what the economy needs is for people to get out and spend.”
Save Save Save:
Brian Johnson, insolvency partner at HW Fisher chartered accountants, says:
“You can see the Bank’s logic, as more people spending will act as a stimulus to the economy.
“However, by urging people to spend the Bank of England is asking the British public to take a real leap of faith, especially when faced with considerable uncertainty in the form of public sector cuts and fiscal tightening.
“The British public will also be baffled by the mixed messages it is receiving. On the one hand we have the government saying that our country needs to massively cut its debt, and as soon as possible, on the other hand we have the Bank of England telling us to spend, spend, spend.
“Charlie Bean’s message also completely contradicts what people have been urged to do over the past few years, namely pay down their debts and prepare themselves for the age of austerity.
“A paradox of thrift it may be but for the Bank of England to openly encourage the public to spend in such an uncertain climate is a dangerous strategy that may well backfire.”
While rates may not be as high as they were in the boom times before the credit crunch, savers are still able to get some reasonable rates on some savings accounts, Isas and fixed rate bonds.
Alternatively, those looking to secure higher returns may wish to consider stocks & shares ISAs, allowing them to invest in shares but without having to pay income tax on their returns.
According to figures released from the government, the total value of stocks and share Isas invested by UK consumers has exceeded the value of the cash Isa deposits.
The provisional figures for 2009-10 showed that the total number of funds held in stocks and shares Isas was worth £178bn, while the total held as deposits in cash Isas stood at £172bn.
The number of stocks and shares ISA accounts also increased from 2,960 to 3,017 in the 12 months to 5 April, marking a 53% increase in the value of stocks and share Isas which reflects last year’s rise in stock markets.
The total value of funds held in cash Isas, which currently pay an average rate of just 0.69%, rose by 9%.
Throughout the last financial year, cash Isas offered even lower returns for investors, with rates at an average of just under 0.5%.
Most good cash Isas on today’s savings market offer bonus rates to attract new custom. However, after the introductory period ends the rates fall significantly, leaving many accounts paying measly returns. Those that want to keep their savings in high rate accounts high need to stay on top of their Isas and be ready to transfer their ISA funds elsewhere once the bonus rates expire.
Around one in 3 of UK’s adults currently have a cash Isa.
As the Isa season approached this financial year, savers were given a boost to the amount of money they can invest into Isas, with the allowance boosted from £7,200 to £10,200, of which half can be saved in cash and half, or the total amount in stocks and shares.
With the Bank of England base remaining at it’s record low, many banks are unable to offer rates that compare to those available before the downturn, so savers are having to look elsewhere for decent returns.
Stocks & shares Isas offer the potential to provide much higher returns than their cash counterparts, but they come at a risk, as you would expect from stocks and shares trading, so investors must be prepared to take a gamble.
However, those that sleep easier at night knowing that their funds are safe and provide a guarantee may be interested in locking their savings away in a fixed rate Isa.
Much like fixed rate bonds, these ISAs require savers to lock their funds away for a fixed period of time, offering a better interest rate in return.
