Your Money: Savers dictate society rates

IT IS easy to have a knee-jerk reaction to last week's round of mortgage rate cuts and complain that the full 1 percentage point off lending rates is not being passed on to borrowers.

But building societies do not obtain the bulk of their cash to lend to home buyers from the money markets. It comes from savers.

They need buyers and savers to make the merry-go-round work. Indeed, there are no other players. The societies are owned by their members - borrowers and savers. And there are a lot more savers than borrowers. Most of the cuts that societies pass on to borrowers are cuts in savers' returns.

There is, of course, a margin between the two, which societies need to pay staff, run branches and remain solvent. They even admit now that cutting savers' rates before lowering mortgage rates is a way of garnering profits to oil the mechanism.

Understandably, many people who are beyond the mortgage paying age, and rely on their savings to live, resent the screaming headlines that say the rate cuts are good news.

The building societies have to balance the interests of the savers, who outnumber borrowers by about six to one, with those of the more captive borrowers.

They have found it hard to hang on to money recently, and with falling interest rates, the competition is not merely other deposit-type boltholes such as National Savings but also equities in all their guises.

With the FT indices currently yielding 4.34 per cent, investing in shares, unit trusts or investment trusts, which can almost match the income yield and may produce capital gains, seems a good bet.

So when Mark Boleat, director-general of the Council of Mortgage Lenders, said that even if base rates fell further, home buyers were unlikely to see mortgage rates go any lower, he had his eye on the savings rates rather than the mortgage rates.

Centralised lenders who reflect money market rates are poised to return to the fray.

But while savers are free to move their money between instant-access building society accounts, gilts, shares and unit trusts, mortgage borrowers are more firmly tied down.

Even without taking a view on interest rates and opting for a fixed-term, fixed-rate mortgage, borrowers find it much more difficult and costly to change lenders.

Many home owners have spent the past few years ruing the day they greedily seized a loan from a 'cheap' centralised lender, only to see the rates rocket and remain stubbornly high. The lesson should be that you can afford to take a short-term view with no-strings deposits and investments but with tie-me-down home loans, a long memory is a useful defensive weapon.

PENSIONS are a difficult enough game as it is, without the goalposts being continually shifted.

In April, the new tax year brings a big change in the government bribes to persuade people to give up their right to a boost in their state pension related to earnings.

After five years, the 2 per cent incentive goes, and the rebate is cut by 1 per cent to 4.8 per cent, although for the first time there is a 1 per cent boost for the over-30s.

So all the existing rules about the ages and income levels at which it makes sense to stay in Serps or opt out are having to be rewritten.

There are no simple answers. Each pension provider, for instance, will have a different cost structure, which will give different answers to the same questions.

Legal & General, for instance, says as a guideline that those earning under pounds 6,500 this tax year should stay in Serps, but after April the break-even point moves to pounds 9,500. This is because at the lower income levels the smaller rebate sums will be wiped out by the costs of setting up a personal pension.

Men under 45 and women under 40 have been advised to jump ship. But next year, because of the loss of incentives, the ages move down by about five years.

If you are already out of Serps, it may not be worthwhile giving up the personal pension if there is a chance you may want to rev it up again in a few years' time.

Because, yes, there is another change on the horizon. The Government has not spent pounds 6.7bn bribing 5 million people to leave Serps, only to see them hop back in again.

So the simple 1 per cent bonus for the over 30s is going to be replaced by age-related rebates all along the scale in three years' time.

And the arithmetic will start all over again.