Is your money languishing in a closed account with a low interest rate?

Savers with money in closed accounts are being short-changed when it comes to the interest rate they are earning. 

The average closed easy-access account rate has been lower than the live equivalent for the past two years, according to Moneyfacts.  

While the gap was only 0.08% in July 2022, it stands at 0.31% today. The average closed rate is 2.82% while the average live rate is 3.13%. 

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A gap of 0.31% might not sound like something to lose any sleep over. If you had a balance of £10,000 in the bank, you would only lose out on £31 per year by sticking with the lower rate.

However, it raises a broader issue about savings inertia. Customers who don’t proactively shop around are losing out. 

The best easy-access savings accounts are currently offering rates north of 5%. Neither the average closed rate nor the average live rate looks particularly attractive in this light. 

Are the big banks short-changing customers?

Many people choose to put their savings with the biggest high street banks, but it’s often the challenger banks who offer the highest rates. 

MoneyWeek’s round-up of the best deals on the market reveals Cahoot is currently paying the top easy-access rate at 5.2% AER, however this only applies to balances up to £3,000. 

Chase is paying the second-best rate at 5.1% on balances up to £1 million (but bear in mind that the Financial Services Compensation Scheme only protects savers for balances up to £85,000). This deal includes a 1% bonus that will run until January next year.

Meanwhile, the biggest banks are paying less than 2% on their most flexible savings accounts, Moneyfacts reveals.

Source: Moneyfacts.

It is worth mentioning that many of the big banks offer better rates for customers who sign up to membership schemes. For example, Santander Edge customers can earn up to 7% interest (AER) on their savings.

The downside is that there are some hoops you will need to jump through to qualify. 

You would need to open a Santander Edge current account, which comes with a £3 monthly fee. You would also need to pay at least £500 into your current account each month and have two active direct debits.

What’s more, the linked savings account only pays interest on balances up to £4,000. Furthermore, a portion of the 7% interest rate is a bonus rate which is only available for the first 12 months after opening the account. 

Lots of accounts come with conditions like these, so it is important to read the small print carefully before moving ahead.

“Building societies and challenger banks continue to work hard to entice new deposits and reward loyal customers so they are worth comparing against the more familiar high street brands,” says Rachel Springall, finance expert at Moneyfacts.

Will savings rates fall?

The Bank of England is currently holding interest rates at a 16-year high of 5.25%, but it is expected to cut the base rate later this year – potentially as early as 1 August.

“This is a window of opportunity for savers, so now is the time to clamber in and grab a decent rate before it closes,” says Mark Hicks, head of active savings at Hargreaves Lansdown. 

He adds: “If you don’t need access to your money for a period, now is the time to consider a fixed rate account. You can lock in a rate of as much as 5%, which is only going to look more attractive when rates eventually fall.”

Although rates are expected to fall later this year, it’s not all bad news for savers. Consumer Duty rules could also have an impact on the savings market – but to the benefit of customers. 

The regulator has introduced new rules about closed products, which come into force on 31 July. As part of this, providers will be required to ensure that closed products offer fair value. 

“In the months ahead, it will be interesting to see if any savings providers pull closed savings accounts or move customers onto different products,” says Springall. 

She points to a recent survey from Moneyhub, where 36% of respondents felt Consumer Duty rules would drive banks to become more customer-centric institutions.