Savers may want to get their skates on to benefit from the top-paying savings accounts following November’s base rate cut.
If you’re lucky enough to have some spare cash available, then in recent years you’ll have benefited from some of the highest savings rates seen since 2008. Savers can earn as much as 4.80% interest on some short-term fixed rate bonds, but deals are starting to disappear as rates are expected to continue to fall over the long term.
Both fixed and variable savings rates crept upwards last year, following 14 consecutive hikes in the Bank of England base rate, but are easing after the base rate was cut twice this year, in August and November. Interest rates currently stand at 4.75% following the latest quarter percentage point reduction earlier this month.
Here, we explain what sort of returns you can currently expect to earn on your savings and where to find the top-paying accounts.
How much interest can I earn on my savings?
The highest rates for easy access accounts are currently sitting at 4.85%, with the top rates on the best five-year fixed-rate bonds sitting at 4.60%.
With interest rates currently higher than inflation, savers are still in a strong position for now, but savings rates have fallen significantly since the first base rate cut at the start of August. According to financial website Moneyfactscompare, the average easy access savings rate fell from 3.15% at the start of August to 3.03% at the start of November, while the average easy access ISA rate fell from 3.36% to 3.24% over the same period.
“Savers are the ones who feel the force of cuts to interest rates, and to add insult to injury, will see no rise to any personal tax or savings allowances in the short-term, making Cash ISAs increasingly attractive,” said Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.
“After this latest base rate decision, providers may start to reduce the rates on their variable accounts. As a result, savers should act quickly if they want to secure a competitive rate. Any savers with money that they don’t need to access can protect their savings from any potential future falls in interest rates by locking them away into a fixed rate bond.”
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What are the top savings accounts?
With living costs still high, it’s more important than ever to ensure you’re earning as much in interest as possible on 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.
Top 5 Easy Access accounts
by Raisin UK
Interest (AER): 4.51%
Interest on £5,000:
+£229
Guarantee:
£85,000
Interest (AER): 4.50%
Interest on £5,000:
+£228
Guarantee:
£85,000
Interest (AER): 4.48%
Interest on £5,000:
+£227
Guarantee:
£85,000
Interest (AER): 4.20%
Interest on £5,000:
+£213
Guarantee:
£85,000
Interest (AER): 4.13%
Interest on £5,000:
+£209
Guarantee:
£85,000
Alternatively, you may decide to save into a cash ISA for tax-free interest, if you aren’t using this year’s £20,000 annual allowance to invest elsewhere. Read more in our article Best cash ISA rates – which cash ISAs pay the most interest?
Fixed-rate bonds usually pay more than easy access accounts, but you can’t generally withdraw money from this type of savings account before the term ends without penalty. If you need to get your hands on your money urgently, you can close the account, but more often than not 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.
Mark Hicks, head of active savings at Hargreaves Lansdown said: “Savings rates have fallen significantly over the past twelve months on the back of lower inflation and lower central bank rates. But this isn’t a straight line. Over recent weeks and months, inflationary expectations have built both in the US and the UK, which has been better news for savings.
“It means that while the easy access market has fallen in line with Bank of England base rate reductions, fixed terms have stayed relatively stable. Banks always have one eye on rates in the future when deciding what fixed deals to offer, so growing indications that rates could stay higher for longer have ensured they remain rewarding. With plenty of savings accounts still offering over 4.5%, cash is still a very attractive asset class.”
What should savers do?
See if you can get a better return on your savings elsewhere. Check savings websites such as SavingsChampion or Raisin, or price comparison sites such as Moneyfactscompare or GoCompare to see if you can find a higher interest rate to move to.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, the online investment platform, said: “While the best savings deals are still comfortably outstripping inflation for now, the combination of higher inflation and easing savings rates may dull the outlook from here.
“Locking in the best savings deal possible, while rates remain higher, is the best inflation-beating strategy, particularly for those with cash languishing in an account delivering dismal returns. For those with sizeable sums in a savings account, that puts them at risk of paying tax on the interest they earn,a more tax-efficient strategy that takes advantage of the benefits that come with Individual Savings Accounts (ISAs) and pensions is key at a time when frozen or cut personal tax thresholds are dragging increasing numbers of people into paying higher rates of tax as their pay increases.”
If you already 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?
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