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The Bank of England’s Monetary Policy Committee will meet on 6 February 2025 and vote on whether or not to lower the base rate. Many experts anticipate the rate will be lowered from 4.75% to 4.5%.
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 between 4.6% and 4.85%, with some cash ISAs paying just over, or just under, 5% AER. However, these rates could start falling quickly if the base rate drops. 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 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 make?
Maximising the interest earned on your savings is one of the easiest ways to get your money working harder.
Money you keep as 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, making the things you want and need less affordable.
To ‘beat inflation’, your money needs to earn interest faster than the inflation rate. If inflation stays at 2.5%, 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, £1025 based on 2.5% 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? Seize the moment and 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’re already a successful saver and have a separate pot of money stashed for emergencies, 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 interest rate when they don’t touch the 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 some of the best interest rates on the market. With some providers, you’ll need to be prepared to sacrifice the convenience of instant access to get the best returns. For example:
- Ulster Bank offers a 4.5% Annual Equivalent Rate (AER) on savings, with instant withdrawals, but you’ll need to deposit £5000 to access this rate.
- If you’re happy to manage your savings entirely through an app, Sidekick Money is offering 4.75% AER plus a bonus 0.45% for the first 12 months, provided you have £1,000 to deposit. You can get money out of this account the next working day.
- Aviva Save promises 4.85% AER with Oaknorth Bank, but asks for a £10,000 deposit, and requires 90 days’ notice before you can take your money out
Tip: To help reduce the temptation to withdraw your money too soon, check with the account provider how often interest is calculated and when it will be deposited in your account.
Following a base rate cut, the interest rates offered on easy-access accounts are likely to drop within a couple of weeks. For example, Chase has warned savers that the AER on its saver account will be lowered from 1.25% to 1.5% below the Bank of England base rate on 19 February. If the base rate falls to 4.5% on 6 February, we could see an account earning 3.5% interest quickly change to 3% AER.
Higher interest accounts may not be an option if you have only recently started saving, but don’t let that throw you off track. Santander’s Edge Saver account has a maximum, rather than a minimum, deposit limit. Balances of up to £4,000 can earn 6% AER for the first 12 months, which then drops to 4.5%.
Atom’s Instant Saver can be opened without needing to put any money in to begin with, pays account holders with 3.55% AER, with no limit to the number of withdrawals you can make if you need money in a pinch.
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 Co-op Bank Regular Saver Account boasts a high interest rate of 7% AER, with no restrictions on withdrawals. Savers can open an account with as little as £1, topping it up by a maximum of £250 each month. This account requires you to have a Co-Op 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 accounts
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.
The Personal Savings Allowance allows you to earn a certain amount of interest on our 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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