MSE News: Inflation rise means all savings are 'losing' accounts

dunstonh

What charges on savings accounts?

Savings accounts have an implicit charge. It is the net interest margin between what the bank makes and what it gives you. It can be low at times and high at times. You dont know what it is as you are not told. However, typically the figure is around 1-3% p.a. You didnt think they were giving you savings accounts with interest for nothing did you?

Right now I'd be very happy if all my money ws in NS&I index linked as I'm sure would many people - LOL!. However, a year or so ago they weren't competetive enough to even be mentioned as a viable option on the Banking and Saving section of this website.

NS&I index linked certs were frequently mentioned and suggested as a good option. They got lots of coverage on here.

[Deleted User]

dunstonh wrote: »

NS&I index linked certs were frequently mentioned and suggested as a good option. They got lots of coverage on here.

Sure, many people have always considered NS&I index linked to be a really great option because of the safety - guaranteed to beat inflation. And yes, many people have always favored them because eliminating risk completely is their priority. They've always been a serious option for me.

But a couple of years ago they weren't recommended on the Banking & Saving section of this site - I *think* they were mentioned but they were (correctly) described as being a very poor return despite being 100% guaranteed to grow your money above the higher inflation rate - TAX FREE.

But my point was that anyone that took advantage of high interest rates in the 'good years' has built up a good buffer. Even if they're loosing now they might still do better in the long term than people that played safe and always opted for guaranteed inflation beating returns.

Obviously the ideal is to take advantage of good rates without locking in and then shift to guaranteed inflation beating products when interest drops below inflation. But as we've seen, that's not always easy to do and there's a lot of luck involved. NS&I certs were fab in lean times because there really was no risk - if interest rates rocketed you could always pull out after a year with just a tiny penalty.

Kohoutek

dunstonh wrote: »

Savings accounts have an implicit charge. It is the net interest margin between what the bank makes and what it gives you. It can be low at times and high at times. You dont know what it is as you are not told. However, typically the figure is around 1-3% p.a. You didnt think they were giving you savings accounts with interest for nothing did you?

That's a good way of putting it, but charges on savings accounts in terms of the total deductions from an investor's return are a lot more transparent than funds, since the headline interest rate on a savings account is a case of "what you see is what you get".

I would suspect quite a few investors in funds don't realise that the annual management charge doesn't include several types of overheads of running the fund that are taken out of investors' capital.

Loughton_Monkey

Kohoutek wrote: »

That's a good way of putting it, but charges on savings accounts in terms of the total deductions from an investor's return are a lot more transparent than funds, since the headline interest rate on a savings account is a case of "what you see is what you get".

I would suspect quite a few investors in funds don't realise that the annual management charge doesn't include several types of overheads of running the fund that are taken out of investors' capital.

Yes, with savings it's "What you see is what you get." With Investments, it's "What you get is what you see." And what you see might be rather volatile!

Actually, I don't agree that savings charges are 'transparent' as you suggest. The contract rate is certainly transparent, but the 'charges' are not. Even for the banks themselves it is not transparent! You see they cannot determine their costs with any degree of accuracy.

If a bank really wants to determine the 'profit' on its retail savings operation, then it needs to work out interest received on the whole bag of mortgages (at 150 different rates). Then it needs to work out the average retail interest rate it is giving (at another 150 different rates).

All that is relatively easy, but now they have to apportion the costs of a branch over how much time it spends on 'savings', as opposed to 'mortgages', as opposed to 'investment products', as opposed to 'none of the above'. Same with huge IT department. How much supporting savings products, fund management, mortgages, structured products, commercial products......

All banks will do such estimated costing, but believe me, it's about as accurate as builder's estimate!

My own view is that we are seeing - and will continue to see - further recognition that Financial Services Retail Premises are simply too expensive. Compare the extremes - of me shoving £10K into an Internet savings account for a year, by automated Direct Debit - and then of you putting £950 into a passbook account and going in every week chatting to the girl, putting £50 in one day, and withdrawing £23.50 the next.....

But back to 'charges'. On the back of an envelope, maybe you should look at a mythical but typical high street Building Society [not many left]. What will they be getting on mortgages? I would guess around 4.5% average? What will they be paying the average saver? Probably about 2% average. So a gross margin of 2.5%? That's pretty expensive! Out of that, they have to pay mortgage defaults, salaries, cost of branch network, marketing costs etc.

Compare that with a slick on-line only operation, who can attract loads of savings at 2.8% and then lend it out in the sydicated loans market at 4%. 1.2% gross margin, but wafer-thin costs.

[Deleted User]

I wouldn't describe that as 'charges'.

For example, I sell a software product for a living. I charge a fixed price. That price covers development costs, R&D, overheads and of course profit for me. My customers buy the product at the advertised price and they pay zero charges.

I would equate this to me choosing a savings product with an advertised interest rate. An off-the shelf product with no added costs or charges. You get what it says on the tin and really you don't give a damn what the providers costs were.

Some investments work in a similar way. For example, off-the-shelf packages that guarantee a return of X amount (possibly more) in X years. Yes, there are costs and charges with these deals but that isn't relevant to me as what I'm buying into is the guarantee of X amount in X years. I care about the bottom line - not how they go about delivering. The risk is with the provider...along with the possibility of big gains. Fine by me.

Where it gets very nasty is when there is no guaranteed return. Often the setup charges come out of your capital so from day one your investment is worth substantially less than you paid in. Either that or it earns next to nothing for years because of charges. And no guarantee that it will ever recover. If it does recover it can be wiped out at any time. Any investment that doesn't come with a guarantee can be wiped out - even those peddled as 'safe' options. All the risk is yours and you pay for the privilege. Fine if you get lucky, but if it goes badly for you it would be devastating.

Savers that are nervous now (a short period of time where it's not possible to find interest rates that match inflation) would positively pee their pants in a situation where your investment is worth less than you paid with no guarantee of it ever recovering. Investments aren't going to be a viable alternative to these people - unless they come with a guarantee.

SnowMan

(following announcement of 3X inflation increases on stamps, stocking up on stamps for next few years will provide better returns than putting money in savings accounts )