There’s little doubt that it’s been a bleak few years for savers in the UK. Since the global financial crisis, interest rates have been at rock-bottom levels, and it’s likely you’ve seen only modest returns on your cash savings.
Though, since December 2021, the Bank of England (BoE) has increased the base rate 14 consecutive times, offering a beacon of hope to savers.
However, the Financial Conduct Authority (FCA) and the chancellor recently criticised several high street banks and building societies for not passing on interest rate rises in the form of better deals for savers.
As such, it may be wise to shop around and regularly review the interest rate you’re receiving on your savings. Otherwise, you could be missing out on hundreds, or even thousands, of pounds each year, depending on how much you have saved.
Despite the importance of shopping around for a new account, many in the UK have never done so – a survey reported by Wales Online reveals that half of Brits have never switched savings providers. Moreover, the study found that a quarter of adults think that making the switch is too much hassle.
Continue reading to discover why it’s essential you proactively review your savings account on a regular basis.
Banks and building societies were recently criticised for not passing rate rises on to savers
Even though banks and building societies have increased mortgage rates in line with the increasing BoE base rate, the FCA has criticised banks for not passing these rate rises on to savers.
The regulator has warned these banks about the need to introduce a minimum rate for products to protect consumers from “loyalty penalties”.
The chart below shows the base rate and the average Consumer Prices Index (CPI) percentage change against the average easy access savings account interest rate each quarter since the start of 2022.
Source: Building Societies Association and Office for National Statistics
As you can see from the table, the BoE base rate has been climbing steadily since the start of 2022, while average easy access savings account rates have struggled to keep pace.
The controversy surrounding these low interest rates on savings in relation to the BoE base rate may indicate that some banks are prioritising profit generation over providing competitive rates to savers.
Some hope for savers lies in the recent implementation of new Consumer Duty rules on 31 July 2023. Under these new rules, all financial firms must provide customers with products and services that meet their needs and must demonstrate that they’re acting in good faith towards consumers.
By shopping around, you could counter the effects of inflation on your wealth somewhat
With interest rates on savings from some high street banks and building societies still relatively low, it’s worth shopping around for on a regular basis to ensure you’re making the most of your cash savings.
This is especially the case during periods of high inflation. That’s because inflation erodes your wealth’s purchasing power in real terms when it is higher than the rate you receive on your savings account.
And, as the table above shows, there has been a disparity between the CPI and the average easy access savings account rates since the start of 2022.
If you shop around and switch to an account with even a slightly higher interest rate, you could generate hundreds of pounds in additional interest each year.
Here’s an example.
The Guardian reveals that the average easy access savings account rate across nine of the largest savings providers – including Lloyds, NatWest, and HSBC – was 1.25% in May 2023.
Meanwhile, Moneyfacts reports that the best annual easy access savings account rate from a smaller competitor is 4.63% as of 3 August 2023.
If you remained on the 1.25% savings rate and had £20,000 saved, you would earn £250 in interest each year. Though, by shopping around and moving your £20,000 into the easy access savings account that offers 4.63%, you would earn £926 a year – a £676 annual increase.
This extra income can add up over time and contribute to the growth of your savings, helping you combat inflation and make the most of your wealth.
It may be worth exploring alternative account types
Shopping around for better savings options could also lead you to discover alternative account types that may better suit your financial goals and milestones. For example, if you currently use an easy access account, an Individual Savings Account (ISA) may be a better fit.
This is because any interest you earn in a Cash ISA is exempt from Income Tax, and the rates can be competitive. Indeed, Moneyfacts states that the best rate for a two-year fixed-rate Cash ISA is 5.9% as of 3 August 2023.
Alternatively, if you have a longer investing horizon, you may find that a Stocks and Shares ISA would be a better home for your wealth.
Here, you have the potential for investment returns that could outstrip the interest you receive on your cash savings, and returns are free of Capital Gains Tax, Income Tax, and Dividend Tax.
However, it’s important to remember that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Get in touch
If you would like some help understanding how best to structure your wealth, then we can help.
Please contact us via email at info@investmentsense.co.uk or call 0115 933 8433 to find out more.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
