It’s getting more difficult to protect the value of cash savings against inflation. UK annual consumer price index (CPI) inflation spiked to 1.5% in April, with the Bank of England forecasting that it will hit 2.5% by the end of this year. Interest rates are not keeping up. The average easy-access savings account pays 0.16% , compared with 0.4% a year ago.
Banks have little incentive to raise rates. Thanks to lockdowns the average UK household has now amassed £4,353 in “excess savings” (extra money saved in addition to normal saving), according to Investec. The banks are swimming in cash. Britain’s “big four” lenders (Barclays, HSBC, Lloyds Banking Group and NatWest) collectively took in more than £200bn in new deposits last year.
App-based Atom bank currently offers the best easy-access savings rate, with its Instant Saver paying 0.5%. Savers who don’t want to manage their accounts through an app could consider the Charter Savings Bank Easy Access account, which pays 0.45%. Notice accounts, which require advance notice before money can be withdrawn, give slightly better returns. Shawbrook Bank’s 120-day notice account offers 0.72%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Check the small print when you sign up for a savings account, says Will Kirkman in The Daily Telegraph. Andrew Hagger of MoneyComms reports that half of the top 50 easy-access savings accounts carry “restrictive terms… more than one in five charge interest penalties to savers who make more withdrawals than their accounts allow”. Keep an eye on bonus accounts too, which pay a high rate up front only to slash it by up to 95% once the bonus period is up. The banks count on consumers’ inertia: a study by Investec found that “two-thirds of people with cash savings between 2016 and 2019 opened accounts paying short-term bonuses”, but just 42% then “moved the money once the bonuses expired”, says John Fitzsimons on yourmoney.com.
Fixed accounts perk up
Things look a bit brighter at the fixed-rate end of the market, says Rupert Jones in The Guardian. Britons have mostly put their excess savings into easy-access savings accounts. Banks now want to tempt some of that money into fixed-rate accounts, which see customers lock away cash for a set period of time (typically between one and five years).
The savings market is “starting to stabilise”, says Derin Clark for moneyfacts.co.uk. The number of products has risen for the first time since October 2020. Average rates on one year fixed-rate accounts increased to 0.44% in May, the first rise in seven months. Yet rates are still well short of the 0.68% level they hit last autumn. Still, 61 savings accounts beat inflation in the year to April, says Ali Hussain in The Sunday Times. You had to be willing to lock your money away for a long time though. RCI Bank UK’s five-year fixed-term account paid 1.9%, while Shawbrook Bank’s seven-year fixed rate bond issue returned 1.8%.
With inflation spiking and rates falling, no accounts look set to repeat the feat this year. The best longer-term rate available today is Aldermore Bank’s five-year fixed-rate account, which pays 1.45% per year. Yet it seems risky to lock in that rate when inflation is already above that level, and rising. Better to preserve your “optionality” by holding the cash in an easy access account so that if better rates become available, you can move. And if you can really afford to lock up your cash for five years-plus, perhaps consider investing it rather than putting it in the bank.
-
The top stocks in the FTSE 100After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
-
A junior ISA could turn your child’s pocket money into thousands of poundsPersuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
-
Parents face £1,000 'nanny tax' – how to afford itHiring a nanny is about to become even more of an expensive hassle for families, especially those in London. Here's how to cut costs
-
Is it cheaper to be a sole trader?It might be cheaper to be a sole trader due to changes to the tax system
-
The best fintech apps on the marketFrom digital banking to investment platforms, here are the top fintech apps on the market right now, according to David C. Stevenson
-
What pension providers don't tell you about your retirement moneyCheck the small print from your pension provider or risk losing thousands.
-
Britain’s stifling tax burdenChancellor Jeremy Hunt's Autumn Statement will see the tax burden rise in each of the next 5 years.
-
Brace for a year of tax risesThe government is strapped for cash, so prepare for tax rises. But it’s unlikely to be able to squeeze much more out of us.
-
Lock in high yields on savings, before they disappearAs interest rates peak, time to lock in high yields on your savings, while they are still available.
-
Are lifestyle funds still fit for purpose?Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
