Base-rate cutbacks shall not save thee

SAVERS in Scotland are the most gullible in Britain, and their ignorance and apathy is costing them (pounds) 132 million annually in lost income, according to a report due to be published this week by Tesco Financial Services. However, they could lose even more as big banks exploit the latest cut in base rates to squeeze savers even further.

Returns to savers have fallen to abysmal levels as some high- street institutions have taken the axe to their returns.

The Abbey National set the lead and was first to announce its new rates.

However, these have left some of its accounts paying among the worst returns on offer, and that is before 20% tax is deducted for most depositors.

This opened the way for its competitors to make even bigger cuts than they were at first contemplating.

The Halifax and others then followed the Abbey by cutting returns by more than the 0.25 point underlying fall in the cost of borrowing.

The Abbey National squeezed even more cash out of its customers by cutting the rates paid to them three days before borrowing costs dropped for home buyers, putting the bank in a win-win situation.

Many of the banks rely on deposits from savings to fund their mortgage-lending programmes. There is normally a predictable margin of between two and three percentage points between what they charge borrowers and what they pay to savers.

There are situations, however, when they play with the margin, either specifically to help customers or to boost their own profits. When borrowing costs are high, banks will often attempt to peg mortgage-rate increases to ease homebuyers' burdens, but this means savers' returns get squeezed so that monthly mortgage bills can be kept lower.

Normally, when rates fall to the kinds of historic lows that we are currently seeing, banks will try to do something to help savers, who can suffer sometimes quite dramatically as their incomes are cut. This can be especially hard on the elderly, who rely on returns from their savings for their day-to-day living expenses.

Yet, after the last round of cuts, a number of major banks actually turned the screws even tighter and are now hitting savers where it hurts most.

The Abbey, for example, is paying an insulting 0.2% on a (pounds) 5000 deposit in an instant-access savings account. A (pounds) 2000 investment in a 60-day notice account is earning just 2.25% interest annually. Even the tax-free Individual Savings Account is paying only 4.8% on (pounds) 3000 or more.

Similarly, the Halifax slashed up to 0.4 percentage points off its rates, even though base rates fell by only 0.25 points. However, its returns are still more respectable than those paid by the Abbey.

Its Isa pays 5% interest on (pounds) 3000, 5.2% on (pounds) 9000 and 5.45% on more than (pounds) 15,000. Cuts on returns on its Instant Saver have been even more draconian, at twice the base-rate lop - although, yet again, the account pays considerably more than the Abbey. Savers with more than (pounds) 5000 on deposit will now receive 3.3%, falling to 3.2% for those with between (pounds) 500 and (pounds) 5000.

Savers with Halifax Premium Direct, Bonus Gold, 60-Day Gold and Liquid Gold accounts also need to be vigilant. Their rates typically fell by either 0.35 points or 0.3 points, depending on the band.

A Halifax spokesman admitted that some rates had fallen by more than the slide in underlying lending costs but said that its accounts still remained competitive.

"I know these cuts sound a lotbut, if you look at our rates and not the cut, you will see that they are still quite good," he said.

The Nationwide too fell in step and cut interest on some accounts by more than 0.25 points, although less frequently than at either the Abbey National or Halifax.

Its Isa rate, for example, fell by 0.25 points to 5.25%. But its e-Savings account, like CashBuilder, trimmed interest back by 0.3 points. So e-Savings is now paying 5.25% also.

In general, the Scottish banks have cut by much less, pegging their trimming to 0.25 points or, in some cases, less.

Bank of Scotland clipped the return paid on (pounds) 5000 in a 30- day notice account from 3.25% to 3.11%. An Isa with a (pounds) 3000 deposit will now earn 5.28%.

Similarly, the Royal Bank of Scotland controlled its shears. Rates on its instant-access account fell by just 0.15 points - apart from on the bottom tier, which did not change at all. A (pounds) 2000 deposit will now earn 1.25%.

The 60-day notice account fell by 0.2 points and now pays 3% on (pounds) 5000. The Isa rate was cut by a quarter-point and now pays 4.7% on (pounds) 3000.

l Best-buy savers: Page 10

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