For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
The power of bank switching
The coalition government may not have appeased everyone, but one measure that was introduced under its stewardship which few could argue with was the Current Account Switch Service. At the time of its launch in 2013, an astonishing 75 per cent of current account holders had never switched provider in their lives, with one in five stating that this was down to the hassle and potential risks of doing so.
Certainly, under the old system of switching, there was a fair degree of legwork required on the part of the consumer, not to mention stifling red tape, and liability if things went wrong. The resultant stagnation served to undermine competition between banks, along with customer service delivery.
Under the 24 hours, 7-day-a-week switch service, savers now benefit from:
- - A guarantee that they will be fully protected against any financial loss in the event a problem occurs during the switch
- - Fully switching over an old account to the new one within seven working days
- - Choosing the exact day your account switches
- - A 13-month redirection service, so any debits or credits mistakenly made on the old account are automatically forwarded on
It all amounts to a seamless, convenient option which, in addition, also puts the onus of switching on the banks involved, rather than the consumer.
So, has it had an impact?
Unfortunately, the numbers are somewhat underwhelming. Since the launch of the Current Account Switch Service, fewer than 4 million people have switched. It may sound a lot, but given that there are more than 70 million current accounts in the UK, it hardly suggests a revolution is under way.
Such inertia is counter to our own interests, as it doesn’t stimulate the sort of competition that might have a positive impact on returns. Then again, it is a bit of a chicken-and-egg scenario, whereby the products on offer are so derisory, that the gains for switching are minimal.
For example, the average being paid on easy-access accounts by Britain’s eight biggest banks is now a shocking 0.04 per cent, according to This is Money. True, Bank of England rates were cut from 0.5 per cent to 0.25 per cent last August, but it still represents a disproportionate decline, given that the corresponding average for these easy-access accounts two years ago was 0.33 per cent.
Those with money in cash ISAs have also suffered, with the average easy-access rate having slumped to 0.15 per cent – one that represents a fall of 0.49 percentage points from 2015. Some cash ISA rates offered by members of this octet have actually fallen by double this number of percentage points.
So, what can we do about it?
The irony is that, amid this grisly downward trend among the bigger players, newer banks have actually edged up their rates, or at least put more attractive deals on the table. Indeed, the average paid by the eight established banks is now nearly one full percentage point lower than their less-established counterparts. Yet despite this, an average of £1.2 billion a month continues to be piled into these behemoth’s clutches, with nearly £850 billion in total sitting all but idle.
It shows a clear reluctance on the part of consumers to move their savings to smaller, less-established banks, despite the fact that their money is guaranteed. But the power to avoid fuelling the complacency of the established guard, and to ensure that the tide for savers begins to turn, very much lies in our hands.
With inflation soaring to 2.7 per cent, the time to protect and nurture your hard-earned money is now – and that means making a switch. There are numerous short-term deals available to sweeten your decision to switch savings account provider too, while some are even offering up to £100 in cash for doing so.
Further afield, peer-to-peer lending (P2P) offers even greater returns, particularly with the recent launch of the Innovative Finance ISA. As with all forms of investment, capital is at risk, and there is no cover from the Financial Services Compensation Scheme. This needs to be factored in to your decision. But the reality is that the pitiful rates being offered by major savings accounts mean your money is guaranteed to lose value in real terms anyway, which, in turn, improves the risk-reward profile of P2P in a relative sense.
In the low-interest environment we currently live in, there is a limit to the upward pressure we are able to exert on savings rates at consumer level. Yet that doesn’t change the fact that millions of us are being short-changed. So be proactive, be on the lookout for alternatives. And, above all, don’t be afraid to switch.
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