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High interest rates are a headache for borrowers, with banks charging more for mortgages, credit cards and personal loans. But it’s a different story for savers, who benefit when rates are higher.
The top interest rates for an easy-access savings account are currently floating around the 5% mark, but these rates are likely to begin to fall now the base rate has dropped. We look at the savings accounts offering interest well above the inflation rate, and the factors to consider before rushing to move your cash.
Why should I pay attention to interest rates?
When the base rate falls, interest earned on savings or charged on borrowing follows, as banks and lenders adjust their financial products accordingly. That’s why now is a great time to review whether your money could be working harder for you somewhere else.
How much difference does interest actually make?
Money you keep in cash is devalued by inflation – the rate at which prices increase over time. The same applies to money that’s trapped in low interest accounts. If prices rise faster than your money grows, your spending power will diminish.
To ‘beat inflation’, your money needs to earn interest faster than the inflation rate. If inflation stays at 2%, the amount of ‘stuff’ that £1000 will pay for today is likely to be noticeably less a year from now. The same goods and services will cost, on average, £1020 based on 2% inflation.
On the other hand, £1000 left in a savings account earning 4% interest will grow to £1040 in 12 months, leaving you better off, even when inflation is factored in.
“Why would you not want an account that does the same job but pays you more?” says Mike Barrow, a financial planning consultant at Wealth Wizards, who says that big-name banks “can get away with offering a measly interest rate on savings” because many customers get stuck in their ways.
Ready to climb out of the cash trap and grow your savings? Follow these steps.
1. Decide what you’re saving for
If your main pot of savings is your emergency fund, you may need the money quickly if faced with an unexpected bill. For those still building up emergency savings or starting saving from scratch, an instant-access savings account or an easy-access ISA might be more suitable.
“Easy-access accounts generally offer the ultimate level of flexibility, allowing you to deposit and withdraw money without limit at your convenience,” says Barrow, though he encourages clients to double check any restrictions on withdrawals.
If you’ve already got a healthy amount of savings and a pot of money stashed for emergencies, you could consider locking spare cash away for longer to earn additional interest. Fixed-rate savings accounts work well when you’re saving for a specific goal, such as a house deposit or next year’s holiday. Banks typically reward savers with a higher rate of interest if they’re prepared to leave their money for at least a year.
Fixed-rate savings accounts don’t always allow withdrawals. Those that do may reduce the interest they pay you. Before committing your cash to a fixed-rate account, revisit your budget to make sure you can cover your outgoings when your savings aren’t accessible.
2. Look at how much you’ve saved so far
A minimum deposit is needed to get the best interest rates on the market, and you’ll need to be prepared to sacrifice the convenience of instant access to get the best returns. For example:
- Ulster Bank boasts a 5.2% Annual Equivalent Rate (AER) on savings, but you’ll need to deposit £5000 to access this rate.
- Aviva Save promises 5.02% AER, and asks for a smaller minimum deposit of £1000.
- The Bank of Scotland’s fixed-rate bond account is offering 4.4% AER for two years, but you’ll need to have £2000 to open one. It was offering 5.5% before the base rate fell.
- Starling asks for a £2000 deposit, in return for 4.48% AER on its one year fixed saver. It was 4.8% before the base rate fell.
The interest rates offered on easy-access accounts are likely to drop when the base rate comes down.
Higher interest accounts may not be an option if you only recently started saving, but don’t let that throw you off track. Halifax is offering 4.4% AER on its one year fixed-rate savings account, and requires a deposit of £500 upfront. Atom’s Instant Saver can be opened with just £100, rewarding account holders with 4.11% AER, provided you don’t make any withdrawals for 12 months.
3. Consider switching current account
Some banks offer higher interest rates for savers with smaller deposits, but only if customers bank with them already. If you’re serious about securing one of the top interest rates before the base rate falls, switching your current account could open up more options.
For example, the Chase UK Saver Account boasts an interest rate of 4.1% AER, with no charges for withdrawals and no minimum deposit. This account requires you to have a Chase current account, but Barrow says switching “couldn’t be easier”. “It’s a matter of applying for the account you want (which can be done online), waiting for a decision (often instant) and then transferring your savings to your new account – just like you’d transfer money to a friend.”
Ola Majekodunmi, the founder of All Things Money – a platform designed to help young adults build financial literacy, recommends savers keep a close eye on how their bank responds to the Bank of England’s decision. “If your existing savings accounts decide to change or lower their savings rates, shop for the best rates on the market.”
Majekodunmi says that some savers worry about their credit score being impacted by shunting savings between different accounts. But, unlike credit cards and loans, opening a savings account does not require a hard credit check and it won’t be recorded on your credit record.
4. Mix and match
As your financial confidence increases, you could try keeping a few different savings pots on the go at once: one that you pay into regularly, one that you dip into as required, and another that you leave to grow for longer, such as an ISA, which shelters your savings from tax.
With the Personal Savings Allowance, there is a certain amount of interest you can earn on your savings tax-free (£1,000 per tax year for basic rate taxpayers and £500 for higher rate taxpayers). Anything over this amount is subject to tax. “ISAs come in handy for anyone that might exceed this allowance, as there won’t be any tax to pay, regardless of how much interest you earn,” advises Barrow.
Once you’ve cleared your high-interest debts and are ready to start saving, these nine habits of successful savers could help you squirrel money away for the future. Compare the interest rates on fixed-rate accounts with different terms, depending on your goal. Remember that the longer you can leave your cash untouched, the more compound interest can work its magic on your money.
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