Recent steep interest rate cuts will more than halve the returns savers receive on their money, it was warned today.
Recent steep interest rate cuts will more than halve the returns savers receive on their money, it was warned today.
Elderly people, who rely on the interest paid on deposit accounts to supplement their pensions, will be hit particularly hard by the drop.
One former Government adviser described the falling returns on savings accounts as being like a "tax increase on pensioners".
The average interest rate paid on a £10,000 investment was 4.1% at the beginning of the year when the Bank of England base rate was 5.5%, but this had fallen to 2.88% before yesterday's cut, according to Moneyfacts.co.uk.
If banks and building societies reduce their savings rate by the full 1%, the average rate will stand at just 1.88%.
The move would reduce returns received on a £10,000 investment from £418 a year in January to only £190 annually once the latest cut is passed on.
Pensions expert Dr Ros Altmann, a former Government adviser, said the falling returns on deposit accounts was like a "tax increase on pensioners".
She said: "Policymakers are ignoring millions of responsible citizens who saved for their future, in the hope that rate cuts might free up credit markets and banks might lend more.
"This is a dangerously unbalanced policy mix, especially in an ageing population, and must be redressed urgently."
She calculates that a pensioner with £25,000 of savings would earn nearly £30 a week in interest when rates were at 6%, but with interest rates at just 2%, their income falls by two-thirds to just £10 a week.
Adrian Coles, director-general of the Building Societies' Association, said savers would be disappointed by yesterday's cut.
He said: "Building societies which pass on both this base rate reduction and the last could halve the interest which they pay to their investors in a very short period of time.
"A large proportion of the funds invested in building societies are held by those over the age of 55, building societies will wish to do what they can to protect pensioners from what will be, potentially, a very sharp reduction in their income."
There are also fears that banks and building societies could take the opportunity of the rate cut to reduce their rates by more than 1%.
A large number of institutions reduced their savings rates by more than their standard variable rate mortgage following November's 1.5% cut, with 92% of providers slashing savings returns by 1.5% or more.
Gordon Lishman, director general of Age Concern, said: "Many older people who rely on the interest from their savings to top up their income could be hit hard by these cuts, particularly as so many are already struggling to pay basic household bills."
He urged savers to shop around for the best deal, but added that for people without internet access or with limited mobility this may be difficult to do.
But Prime Minister Gordon Brown claimed the steep interest rate cuts were less damaging to savers than high inflation would be.
He told GMTV: "What I would be worried about about most is if we had inflation going up and taking away the value of people's savings.
"The interest rate going down is necessary to get the economy moving again. If you are a saver the best protection you have is that inflation is kept low."
