21 June 2016
How to get a negative return on your savings
It’s been a bleak decade for savers, with interest rates seemingly on a never ending spiral to nothing.
In such an environment, anyone who likes to play it safe has been left with few options other than to tie their money up for ever-longer periods, in the hope of squeezing a few extra percentage points of interest out of their bank.
Fixed rate savings accounts – or fixed rate bonds, as they’re often called – are nothing new. It makes perfect sense that your bank can afford to pay you more if you commit for longer.
But while they’re rarely shy in shouting about the better rates that you can get in longer-term products, it’s often very difficult to find out what happens to your cash when the fixed term comes to an end. Or what happens if need to get your hands on your money in an emergency or, worse still, if you die.
The auto-roll over trick
Most people assume that when your fixed term account comes to an end, your money will be rolled over into some kind of instant access account, which pays very little interest. And that still happens in plenty of cases.
But a minority of banks do things a different way – automatically rolling customers over into a similar fixed rate deal. This might sound like great service, but it’s generally bad news for customers, and can end up being very expensive.
Typically, banks will write to you between 14 and 30 days before your existing account matures. If you miss the letter, or fail to act, then you’re automatically switched to a new fixed product where withdrawal penalties apply. Worse still, you may not be able to touch the money at all until the new deal comes to an end.
Barclays, M&S, RBS/Natwest are just a handful of the banks that roll customers over into another fixed rate bond. This could be bad for a number of reasons. While they may have been offering a market leading rate when they signed you up a year or more ago, the chances are they won’t be by the time you come to renew.
So even if you want to keep your money tied up, the high likelihood is that you’d be significantly better off by moving it.
Savings out of reach
And it is, of course, quite possible that you don’t want another fixed rate bond. You tied your money up for a year, maybe three, because you knew you’d need it at the end of that period.
But if you’ve failed to open the letter that warns you that your bond is approaching maturity, then you could end up with your money recommitted for another 3 years. At a lower interest rate. And only accessible if you die.
Some fixed rate bonds do offer the flexibility to let you get your hands on your money if you really need it. But of course, there’s a price to pay.
M&S Bank, for example, says you can get your money out of any of its fixed rate bonds at just 35 days’ notice. All you need to do is write a letter. In return, they’ll charge you a withdrawal penalty of £50 if your money is in a one-year bond, £75 if it’s in a two-year bond, and £100 if it’s in a three-year bond.
These charges may not sound too high. But put them in the context of the interest that you’ve earned. M&S’s three-year bond is currently paying a rather uninspiring 1.4%. That’s £14 a year on a £1,000 sum. So take your money out after two years – and you get around £28 of interest, minus £100 penalty, leaving you with a total of £928 – a return of -7.2%.
Now let’s imagine a scenario where you leave your money invested for all three years and then M&S automatically rolls you over into a new fixed rate account. By the time you finally realise, you’ve missed the window to opt for a more flexible option, but you desperately need your money. M&S tells you it’s no problem, and sends you a cheque for £942.
That’s £42 of interest on your £1,000, minus a £100 penalty– leaving you with almost 6% less than where you started just over three years ago.
Until I started reading the Ts & Cs of savings account s few years ago, I had no idea that it was possible to get back less than you put into your account.
On balance, I suppose it’s fair for banks to charge you if you decide to take your money out of an account where you’d agreed you wouldn’t. But if they’re going to offer this flexibility, they need to be very clear about the penalties – and make sure they’re proportionate.
M&S is something of an outlier with its fixed fees. Most dock you somewhere between 90 and 365 days of interest, which seems a much more reasonable way of doing things. Nevertheless, it can still leave you getting back less than you put in. M&S’s fixed fees work out more favourably for savers with larger balances, but they’re punitive for those with less.
Secrets and lies
The main problem, as ever, is communication. There’s no reason why banks couldn’t be crystal clear about what will happen to your money when it comes to the end of a fixed term. Too many banks and building societies simply don’t tell you. Nationwide, for example, just says “Before your term ends, we’ll tell you about your options at maturity”. Why not tell them now?
To my mind, providers shouldn’t automatically roll you over into another fixed rate account unless you’ve specifically told them that’s what you want.
And if they do, they should write to you, email you and text you when your existing account is about to mature – so they maximise the chances of you making an active decision.
Sadly, for now, that’s not how it works. So as ever, my advice is to tread with caution.
This article was first published in the Daily Telegraph on Saturday 18th June 2016