Savers are benefiting from some of the highest rates in decades, following a series of interest rate hikes. 

Both fixed and variable savings rates have been creeping upwards over recent months, following five consecutive hikes in the Bank of England base rate. Interest rates currently stand at 1.75%, their highest level since 2009, and they are forecast to rise further this year in a bid to curb soaring inflation. Read more in our article What the interest rate rise means for you. 

The recent interest rate increases have mostly been factored into the top savings rates, with the highest rates for easy access accounts reaching 1.6%, and rates on two-year fixed-rate bonds sitting at more than 3%. Government-backed NS&I also announced a series of rate hikes recently to its main savings accounts. Read more in our article NS&I raises savings rates in boost worth £1.1 billion.

Rachel Springall, finance expert at comparison site Moneyfacts.co.uk, said: “Savers will find they can earn three times the return on the top easy access account right now (1.60%), compared to the best deal just a year ago (0.50%), which is great news for those looking for a flexible pot to store their hard-earned cash.”

However, not all savings rates have increased in line with interest rates, and many savers are languishing in accounts paying paltry rates. For example, Barclays easy-access savings accounts are paying a dismal 0.01% on savings between £1 and £49,999, despite the base rate standing at 1.75%. 

It’s also important to note that with inflation currently at 9.4% and expected to hit 11% this year, there are no savings accounts offering returns that are anywhere close to keeping up with soaring living costs. You can read more about the effects of both inflation and interest rates on your savings in our article What does inflation mean for my money?

Laura Suter, head of personal finance at AJ Bell, says: “’Inflation means that even if savers are accessing the current top-rate easy-access account, which pays 1.6%, they will still be losing 7.8% in real terms at the current rate of inflation. On £10,000 of savings, that is a loss of £780 a year in real terms.”

What are the top savings accounts?

With the cost of living soaring, it’s more important than ever to ensure you’re getting as much in interest as possible from your cash savings. 

Easy-access savings accounts usually enable you to take your money out whenever you want, without any loss of interest. It’s generally considered wise to have three to six months’ worth of essential spending in an easily accessible account to cover any unexpected costs, such as car repairs or a boiler breakdown. 

For example, AI Rayan Bank, which is the oldest and largest Islamic bank in the UK, is paying an expected return of  1.8% on a minimum deposit of £5,000 on its Everyday Saver. Instead of paying interest, the bank invests deposits in ethical, Sharia compliant activities to produce a profit. Profit rates are expected, but not guaranteed, but the bank has always paid at least the profit rate to its customers since it launched in 2004. 

Elsewhere, Virgin Money is paying 1.71% AER on deposits from £1 to £25,000 to new and existing current account customers on its M Plus Saver. Meanwhile, Shawbrook is paying 1.52% AER on a minimum deposit of £1,000, but you can only withdraw a minimum of £500 at a time. 

Fixed-rate bonds usually pay more than easy access accounts, but you can’t withdraw money from this type of savings account before the term ends without penalty. If you need the money, you can close the account, but this will mean some charges, such as loss of interest. However, you will have the security that the interest rate will remain the same until the end of the account term. Find more information about these accounts and the top rates in our article Fixed rate savings bonds explained.

What should savers do?

If you have savings in a variable rate account, now is a good time to see if you can get a better rate elsewhere. Check savings websites such as SavingsChampion or price comparison sites such as Moneyfacts, or GoCompare to see if you can find a higher interest rate to move to. 

However, bear in mind that savings account rates may have further to rise as interest rates increase in the coming months. If you choose to tie-up your cash in a fixed rate savings account, this means that you cannot move your savings into an account paying a higher rate with another provider. If you have money in a fixed rate account paying a low rate, check what the penalties are for closing your account. 

Springall said: “As interest rates continue to rise, it’s uncertain whether savers would be content to lock their cash away for more than a year, particularly if they feel more improvements could surface or if they need the reassurance of dipping into their savings pot. Spreading cash across both easy access accounts and short-term fixed accounts to secure a guaranteed return could be a wise move to get the best of both worlds.”

Alternatively, if you have plenty of cash savings set aside that you can access at any time, you may want to consider investing for long term gains. After all, savings rates are not high enough to keep up with rising living costs. Meanwhile, stock markets have fallen substantially this year, which could make it a good time to be invested to benefit for the long term. Find out more in our article Investing – the basics and Savings accounts or shares – which is the best option? 

Are you considering moving your savings to an account paying a higher interest rate, or have you already done so? We’d love to hear from you. Join the discussion on the Rest Less community forum, or leave a comment below.

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