As the war for savers’ cash heats up, we’re seeing some interesting products come to the savings market. The Bank of England (BoE) has pushed interest rates up to 5.25% this year as it tries to bring inflation under control, and initially, lenders were slow to pass these hikes onto savers. That’s changing rapidly. You can now earn over 6% on one-year fixed savings accounts (or 6.2% from the government-backed savings provider NS&I), and if you want to put a little away every month, Nationwide’s regular saver comes with an 8% interest rate.
However, while there’s been a lot of progress in the fixed savings market, rates on easy access accounts are, for the most part, lagging.
Savers are set to benefit
According to research from the personal finance app Plum, savers are missing out on £17bn a year in interest due to the fact banks have failed to pass the BoE’s full rate increases onto savers. In a survey of 2,000 people, Plum found the average interest rate on savings was just 3.3%, nearly two percentage points below the base rate. That may be an underestimate.
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Over the summer in its review of the UK’s cash savings market the FCA revealed £250bn worth of savings are sitting in low-interest accounts, earning nothing.
To help consumers get more for their money, Plum has launched ‘Plum Interest,’ which it says will allow customers to “benefit more quickly and directly” from higher rates. With Plum Interest, the variable annual rate, inclusive of fees (more on that later), is 4.94%.
Plum Interest is backed by BlackRock’s money market fund. Money market funds invest in liquid cash-like securities, such as short-term government debt, which is considered a risk-free asset. They’re generally used by companies and wealthy individuals who want to earn interest on large cash balances with the funds backed up by guarantees from governments.
These funds are also better at tracking interest rates as they reflect the true market rate, rather than the rate of interest a bank wants to give its customers.
And while they’re usually used by wealthy individuals and companies, anyone can use money market funds. Most online brokers offer access to these products. Investment platforms interactive investor and Hargreaves Lansdown have both noted Royal London’s Short Term Money Market Fund has been one of the most bought funds by their clients this year.
Almost all money market funds have a management fee, so you won’t get the exact rate of interest, and Plum’s charge is a bit higher than most. Its 4.94% yield includes “both the fund manager and provider charges totalling 0.25% in the UK”.
As Victor Trokoudes, founder and CEO of Plum says, “Money market funds shouldn’t be just the preserve of the few who can afford to access them, so we’re making it easier for people to benefit from them.”
Users also get the benefits of saving through the Plum platform. Plum uses open banking to connect to your bank account (or accounts) and you can then set up savings goals, track spending, open different segregated savings accounts and even invest (for a fee).
“With our Plum Interest product, you won’t have to worry about constantly switching banks to get a higher rate as the product tends to track changes in the central bank base rate,” notes Trokoudes.
Growing number of options for savers
The drawback here is money market fund rates are not fixed. They reflect the interest rate at the time, so if rates fall, the rate of return on the fund will fall as well. The rate can and will change overnight if the BoE acts. That’s something to be aware of if you’re looking to deposit your money in one.
It’s not the only product on the market. Wise (Victor Trokoudes worked at Wise for three years as head of international and banking) uses a similar tool, with access to the same suite of BlackRock money market funds. Anyone who has an investment account can pick up a money market fund, some of which have lower fees. Royal London’s offering, for example, only charges 0.1%, although this excludes other platform fees so the comparison is not like for like.
Still, Plum’s offering is a welcome addition to the savings market for consumers who are looking for ways to wake up their money.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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