In June 2023, the BoE increased its base from 4.5% to 5%. The 0.5% increase was higher than many financial pundits forecast and took the rate to its highest in 15 years. The base rate increases seen in recent months should have triggered increases in savings rates. However, many savers are unhappy about the obvious lag and discrepancy between the two.
An Evening Standard article stated that while the average interest rate for a two-year fixed mortgage is 6.52%, the interest rate for a typical easy-access savings account is only 2.49%.
With inflation still stubbornly high at 8.7% and set to remain high for 10 months, according to sources like Bloomberg and Forbes. Keeping money in these easy-access accounts means the buying power of that money is being steadily reduced in real terms.
Criticism levelled against banks and savings account providers
Unsurprisingly, the slow interest rate rise on savings has come under considerable criticism, resulting in the City Regulator calling a meeting with savings providers. The meeting took place on the 6th of July. With everyone present acknowledging more needs to be done to help savers to access the best rates, the meeting was described by the FCA as being constructive.
Banks’ profits are typically improved when interest rates on borrowing are increased. Just how much is not yet known, but some first-half-year results are in. Lloyds (who own Halifax) has reported a 46% increase in profit for the first quarter, while NatWest has reported a 50% increase.
The magnitude of the increase must be compared to leaner times when profits were down due to a long period of low-interest rates. Even so, the difference between borrowing and savings rates is very apparent, with many accusing banks of profiteering.
Founder of MoneySavingExpert.co, Martin Lewis points out that perhaps banks have a moral obligation to provide consumers with better savings rates as it was taxpayers that helped financial institutions out after the financial crisis of 2008. Which? magazine put it more bluntly, calling the savings rates currently on offer “measly.”
The Different Types of Savings Accounts
Data from the BoE suggests there is approximately £250 billion sitting in cash accounts that earn absolutely no interest. It underlines the comment made by the finance industry that consumers need to look around for better deals and vote with their feet. The various types of accounts available include:
The standard bank account
A standard or current bank account is good for only two things – keeping your money safe and having immediate access to it. It’s hopeless as a savings account as most banks don’t offer any interest on them, or if they do, it’s minimal.
Easy access savings accounts
Although these are savings accounts, the interest rates they offer are low.
One of the best on the market right now is the Santander Edge Saver, which offers a 4% AER, but it has two drawbacks. First, you must already have a Santander Edge current account. Secondly, you can only deposit a maximum of £4,000 per annum.
Most big-name high-street bank easy-access accounts pay way less. The average across the board is 2.49%, but some, like Lloyds Bank, only offer 1.5% AER.
Fixed Rate Savings Accounts
These savings accounts are also known as fixed-rate bonds. They pay a fixed rate of interest over a fixed duration or term, usually from 6 months to five years. Easy access to the money in these accounts is sacrificed in exchange for higher interest rates, although they are still considerably less than that of inflation.
These accounts are a like a halfway house between easy access and fixed-rate savings accounts. Rather than not being able to access money saved until the term has ended, it can be accessed by giving the provider agreed notice. These accounts offer less interest than fixed-rate accounts but more than easy or instant access accounts.
The biggest advantage with all of these types of savings accounts is their safety.
Individual savings accounts (ISAs)
There are several types of ISAs – cash, junior, innovative finance, lifetime and stocks and shares. (Junior ISAs can be either cash or stocks and shares). Cash ISAs are very similar to the savings accounts discussed above regarding the interest rates they offer. The other ISAs are investment accounts rather than savings accounts, and money invested is, therefore, subject to risk.
In return for accepting a degree of risk rather than the almost guaranteed safety of a savings account, the interest rates offered are significantly higher – often enough to significantly better the rate of inflation.
Unless potential investors are financially literate and have in-depth knowledge of investing, it’s best to seek independent financial advice to get the best ISA rates.
Finding the best savings rates
A new consumer duty will come into force at the end of July. It aims to ensure financial businesses put their customers’ interests at the heart of their operations. How effective it will be remains to be seen. In the meantime, it’s important savers help themselves by searching for the best savings rates and, if appropriate, transferring their savings.
There are plenty of comparison sites around on the internet. But don’t just look for the best rates. You need to check out other factors, too, such as how easily you can access money when you need it, any charges that might be involved, and the reputation of the account provider. Most importantly, always read and understand the small print.
When comparing rates, it’s best to use AER (Annual Equivalent Rate). It not only takes into account the interest rate but also any bonuses and charges on the account over 12 months.
Things savers must consider
Having some money set aside for emergencies is always important – unexpectedly large bills, car repairs, health costs, etc. Easy or instant access to an emergency fund is key, but seeking the best interest rate is still important.
Priorities change as we go through life. As well as having an east access savings account or Cash ISA, other options include opening a Lifestyle ISA to help save a house deposit, a Junior ISA for the children, and Stocks and Shares ISAs for retirement.
Investing, whether it’s in ISAs, Bonds, ETFs, etc., does involve risk. But ensuring schemes have FSCS protection, that portfolios are diversified, and any investment is viewed as a long-term investment helps mitigate risk.
The Financial Services Compensation Scheme (FSCS)
The FSCS scheme is designed to protect you when a financial firm fails. The products it protects include banks and societies, credit unions, debt management, funeral plans, insurance, investments, mortgages, PPI, and pensions. When selecting a savings or investment product, it’s a good idea to check its FSCS credentials.
Claim via the FCSC, and it costs nothing. Claimants receive 100% of the claim’s value up to £85,000 for single accounts or £170,000 for joint accounts.
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