The Edge

Richard Northedge takes on corporate finance

Government destroys savings market

Ministers invented ISAs to encourage saving. They introduced Funding For Lending to give banks cheap money. The result is that banks no longer need the public’s money and savings rates have plumetted.

When the Bank of England slashed base rates to a half per cent it was largely a hypothetical rate for central bankers: it was impossible to borrow at anything like that rate and no one would lend for so little. Banks and building societies had to offer upto 3 per cent to encourage savers to deposit funds.

But the Funding For Lending scheme introduced in August 2012 by the Bank of England makes cheap money available directly to retail banks for on-lending as mortgages and small-business loans. Building societies and banks have lapped up these new funds – and no longer need customers’ cash. Savings rates are being slashed to a nominal half per cent – or less.

At that rate it barely matters if an Individual Savings Account pays the interest tax-free.

So don’t expect the usual advertising blitz just before the April tax-year ends to encourage people to use their annual ISA allowance.  Some big banks are suggesting savers take their money elsewhere. Any offer that seems to have a good rate is probably dependent on the saver transferring their whole current account to the bank and won’t allow a transfer of past savings from a bank that has slashed its rates.

There’s little point the government devising schemes that slash taxes to attract savings if it then devises another scheme to discourage saving. It is in the state’s long-term interest for its citizens to have nest-eggs for rainy days. However it is in the state’s short-term interest to stimulate the economy by encouraging people to spend instead of saving.

Perhaps that’s the objective. But a Bank of England policy that has devastated people’s pensions by pushing down annuity rates is being followed by a policy that demolishes the return on their savings, leaving them with a nominal interest rate far below inflation.