Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

Bank of England’s 0.5% interest rate has cost savers £60bn

On top of that, there is now £108bn in current accounts not returning a penny. Patrick Collinson and Hilary Osborne count the cost of ‘emergency rates’

British banks are sitting on more than £100bn of customers’ cash in accounts which are not paying a penny in interest, research by Guardian Money has found. An analysis of Bank of England statistics also indicates that savers have lost as much as £60bn in interest since rates were cut to “emergency” levels in 2009 to combat the financial crisis.

Monday 5 March will mark three years since the Bank of England slashed base rate to 0.5%, and our analysis shows how deeply the pain has fallen on the shoulders of savers, compared to mortgage holders with “tracker” loans who have benefitted enormously.

Perhaps the most surprising finding is how much the banks have gained from the financial crisis by removing interest payments on millions of current accounts. According to the Bank of England, the amount of money not earning interest at UK banks stands at £108.6bn (December 2011) compared with £22bn before the collapse of Northern Rock in September 2007. In the decade prior to the onset of the financial crisis, the amount not earning interest was typically £15bn-£20bn, but escalated rapidly after that.

Most major banks have slashed interest rates on current accounts balances to zero. Since 2007, NatWest, RBS, Barclays, First Direct, HSBC, Nationwide, Santander and the Co-operative Bank have stopped paying any credit interest on a number of their accounts. Other accounts have limited payments to the first £1,000 or so.

Many customers have simply left their cash in current accounts as they feel there is little incentive to move their money elsewhere.

Bank of England figures show that the average rate paid on the £908.6bn held in UK bank and building society savings accounts, including cash Isas, is now just 0.99%.

That compares with the 3.47% that banks paid, on average, on accounts in September 2007, when there was £859.5bn held in UK savings.

The fall has cost savers at least £60bn in lost interest, equal to £1,000 for every man, woman and child in the UK. The 3.47% paid in 2007 suggests total interest payouts of nearly £30bn for that year, compared with just below £9bn earned by savers in 2011. That’s a gap of £20bn a year, and with rates below 1% for nearly all of 2009, 2010 and 2011, suggests that the total interest forgone has already reached £60bn.

But there are ways current account holders can earn interest on their money – in some cases as much as 3%. Similarly, cash Isa savers can find rates of up to 4.25%, if they are prepared to lock their money away for the longer term.

The chance to earn up to 3% is available at Bank of Scotland and Lloyds TSB to customers who add the “Vantage” option to their current account, and on Santander’s 123 current account, which goes on sale on Monday.

At Bank of Scotland and Lloyds, 3% is payable on balances between £3,000 and £5,000. Interest is also paid on smaller balances; 1.5% if you hold more than £1 and 2% on balances above £2,000. You need to pay in at least £1,000 a month to hold either account, and if you go into the red at any point during the month, interest will not be paid. You also need to actively opt in; this is free and can be done online or in branch.

Santander’s new account will offer cashback and in-credit interest on balances above £1,000, but, in line with other banks, the rate will depend on how much you have in there.

Balances of more than £1,000 will earn 1%, above £2,000 will attract 2% and balances of £3,000-£20,000 will earn 3% – and you do not have to stay in credit all month

On top of this, there will be cashback on your main household bills, provided you have set up direct debits to pay them. Account-holders will earn 1% on water and council tax, 2% on electricity and gas, and 3% on mobile, home phone and broadband packages. Cashback is not taxed, so even high-rate taxpayers will get the full benefits of these payments.

The account does have a £2-a-month fee, and there are overdraft charges if you go into the red. To qualify, you need to pay in at least £500 a month and have two direct debits set up on it.

Away from the major current account providers, The Coventry building society is paying 1.1% on a balance from £1, though that includes a 0.84% bonus for 12 months, while Leeds Building Society’s premier current account pays up to 1.25%, but this one is not an option for most people as you need £150,000 in your account to earn it.

A clutch of other providers pay rates below 1%, but it seems unlikely anyone would think that was worth the effort of moving their cash.

For the more ethically-minded, the cupboard is bare. The Co-operative Bank does not pay interest on current account balances, while Triodos Bank does not operate a current account.

One thing that will deter many people from switching to Santander is tales about its customer service. Figures published this week by the Financial Ombudsman show that, in the second half of 2011, it received 3,670 complaints involving banking and credit issues, more than any other bank.

However, Charlotte Hogg, Santander’s head of retail banking says it has worked hard to improve service: “We have made sure we have enough people in the front and back office to cope. We will be following up switches to ask customers how they feel the process went.”

Lloyds TSB was the subject of 2,788 cases also involving banking and credit issues, while Bank of Scotland attracted 2,832.

However, the most complained-about bank overall was Barclays, which attracted a total of 11,524 complaints, of which 6,975 were about its sales of payment protection insurance policies. Overall, the Ombudsman found in favour of the customer in 84% of cases involving Barclays.

A ray of hope for customers is that complaints to the Ombudsman were down by nearly a third in the second half of 2011 compared with the first half. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds