Banks use base rate drop to mask far larger cuts to savings products

Some saving account providers made cuts up to five times larger than the Bank of England base rate reduction last month. And experts warn there is more pain to come.

Hiding behind the Bank: Savings providers have been accused of using the base rate cut to slice disproportionate chunks out of already painfully low savings rates (Getty)

Savers have been stripped of interest worth far more than the latest Bank of England base rate reduction with 354 cuts to savings products in August alone, making it the worst month this year for rate cuts. Some providers, such as United Bank UK, which cut its 7-year bond rate from 2.12 per cent to just 0.82 per cent, made reductions worth five times more than the Bank of England did, and 52 other products saw drops larger than the Bank's 0.25 percentage point cut.

The cuts by banks mean that across the majority of savings products, average interest rates are paying just half what they were five years ago.

“Savers have once again shouldered the burden of a base rate cut, but the sad fact is that rates were already at appalling lows long before the Bank of England slashed base rate to 0.25 per cent," said Rachel Springall from Moneyfacts. Consecutive years of Government lending initiatives meant that the banks lacked a desire for savers’ deposits, resulting in an obvious lack of competition in the market.

"The base rate now sits at its lowest level in over 300 years and has just given providers another excuse to slash rates. Worse still, there are savings deals being completely withdrawn from the market during August, with 20 best buy deals gone," she adds. "Despite an onslaught of cuts being made during August, savers would be wise to brace themselves for more cuts to come, particularly to best buy deals where providers may struggle to cope with demand."

The news comes as data from HMRC reveals British savers and investors are putting cash into stocks and shares ISAs at a record level despite dwindling investor confidence. More than £500bn of individuals' savings are now held in ISAs, with more than £80bn invested in the 2015/16 tax year alone and a record average subscription of £6,338.

‘‘Record subscriptions to stocks and shares ISAs are a reflection of interest rates being at the lowest of the low," added Danny Cox, chartered financial planner for Hargreaves Lansdown: "Equities are pretty well the only game in town for yield, for those happy with the additional risk. Despite investor confidence falling back to 2008 levels and cash ISA interest rates at record lows, savers and investors still understand the longer term benefits of sheltering their hard earned money from tax. Rising markets have helped push total ISA funds to a record high of over half a trillion pounds."

However, while the amount invested in ISAs has risen, the total number of ISAs opened by UK taxpayers has been falling steadily in recent years, with fewer investors putting in more money.

Download a free guide to ISA's with Independent Partner, Hargreaves Lansdown.