Bleak prospects even as Icesave starts to thaw

Bleak prospects even as Icesave starts to thaw

Savers wuith money frozen in the collapsed bank Icesave are starting to recover their cash. But they are being warned not to expect to find high-interest-paying accounts in the wake of the Bank of England's base rate cut of 1.5 per cent earlier this month.

The Financial Services Compensation Scheme (FSCS) began initiating the transfer of payments to Icesave customers about 10 days ago. So far, £500m is in the process of being transferred over to savers and the FSCS says the 'vast majority' of Icesave customers can expect to receive their money back this month.

'A lot of people who had their money with Icesave will have been used to getting a good rate - the bank was at the top of the best-buy tables for at least a couple of years,' says Andrew Hagger, savings expert at price comparison website Moneynet.co.uk. 'But those people will now struggle to find any accounts paying close to the levels of interest they were earning.' Icesave's fixed rate bonds were originally paying over 7 per cent interest while the easy access account was paying 6.3 per cent interest.

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If you had savings with Icesave, the FSCS will send you two emails. The second email is the most important as it will ask you to log in to your old Icesave account to complete the compensation procedure and authorise the transfer of funds. Once you have done this, it should take around five days for the funds to be credited to your nominated account (typically a current account linked to your Icesave account).

David Black, principal banking consultant at financial research website Defaqto, says: 'If you did have your money with Icesave then you will already know that, wherever you decide to put the funds, you should keep your balance lower than the FSCS compensation limit [£50,000]. If you want to move the money from your nominated account, use up your Isa allowance if you haven't already and then consider whether you need easy access to your savings or if you can lock some away in a fixed rate account.'

However, since the Bank of England's base-rate cut almost three weeks ago, there are simply not that many fixed-rate bonds left on the savings market. According to uSwitch.com, 24 providers have now cut interest rates by between 1.5 per cent and 2.55 per cent, including Anglo Irish Bank, which once paid 7.05 per cent on its one-year bond but is now paying 5.55 per cent. Its two-year bond is down 2.4 percentage points and is now offering just 4.6 per cent interest.

But there are still some competitive fixed-rate accounts on offer - although you should move quickly to secure one. Black says: 'While the three-month Libor rate [the rate at which banks lend to each other] remains high relative to base rate, then there will still be savings opportunities around. So if you want a high rate that is close to 6 per cent, then now is the time to open the account. However, only lock away funds if you know you are not going to need them.'

Last week, Kent Reliance building society pulled the last remaining 6 per cent one-year bond on the market. The highest paying one-year bond currently available now is from ICICI Bank UK, paying 5.75 per cent on a minimum £1,000 deposit. Birmingham Midshires is paying 5.6 per cent on its one-year bond (internet only) on an opening balance of £1.

If you can afford to lock away all or a proportion of your savings in a fixed-rate account, your savings will not be affected should the base rate fall again over the next two to three months, as is widely predicted to happen.

If you need access to your savings and still want to earn a decent rate of interest, Hagger recommends considering an online savings account.

He says: 'Internet accounts have always been paying higher interest rates than branch accounts because of the lower overheads for providers. Rates on online accounts aren't looking bad at all - but keep in mind that they may still drop as providers take this month's base-rate cut into account near the end of the month.'

He recommends the AA's internet saver, paying well above base rate at 6.28 per cent, Intelligent Finance's iSaver account, at 5.9 per cent, and Birmingham Midshires' e-Saver, which pays 5.83 per cent. All three of these online accounts can be opened from £1.

moneynet.co.uk; defaqto.com

Spreading the risk

The Financial Services Compensation Scheme will cover you for up to £50,000 of savings held with any bank or building society that has its own banking licence.

If you have more than £50,000 with the same provider, or with banks that share a banking licence, you should consider spreading your money to keep your balance below the £50,000 mark.

guardian.co.uk © Guardian Newspapers Limited 2008