Getting the best possible returns on your savings is a priority for any saver, particularly when living costs are soaring.
Fortunately, savings rates are at their highest level for years following thirteen consecutive hikes in the Bank of England base rate, which has now reached 5%. Even though it’s not possible to find returns that come anywhere near to beating inflation, it is still good news that rates have been creeping upwards in recent months.
Here, we look at five reasons to save now, and how to find the best savings rates.
1. You’ll benefit from rising interest rates
If you have cash savings, returns are now significantly higher than they were a couple of years ago, but it’s imperative you seek out the best accounts, as some providers continue to offer paltry returns. A difference of 2%, for example, might not seem much, but it can amount to hundreds of pounds a year. For example, if you have £30,000 saved at a rate of 2%, you’d earn £600 a year in interest. If, however, you moved your balance into a market-leading easy access account paying 4.5%, you’d earn £1,350 a year in interest, equivalent to an extra £750. Read more in our article What the interest rate rise means for you.
Some providers may wait several weeks before changing rates, so it could pay to be patient. However, there’s no guarantee that your provider will hike its savings rates at all, but if you’re not tied into a fixed-rate account, you could shop around for a better rate elsewhere.
Rachel Springall, from Moneyfactscompare.co.uk, said: “A flurry of savings rate competition and consecutive Bank of England base rate rises continue to improve the savings market. Those savers earning variable rates of interest who take time to review their existing pots may find more attractive returns are available elsewhere, as their loyalty has not been rewarded.
“The top easy access accounts pay around 4%, with the market average around 2%, however, some of the biggest banks pay much less. Shopping around for a better deal is imperative in a volatile interest rate environment, so keeping an eye on the top rate tables and signing up to newsletters is wise.”
2. You’ll build up your emergency fund
At some stage the majority of us will face unexpected expenses, such as a car or boiler repair, for example. At a time when household incomes are being squeezed, it can be difficult to meet these costs if you don’t already have an ‘emergency’ savings pot. If you already have savings, you ideally don’t want these all eaten up in this scenario, or to face a shortfall and have to borrow the money. As savings rates rise, even saving a small amount each month could boost your savings, with some regular savings accounts paying as much as 7% annual interest before tax. Read more in our article How to build an emergency fund.
Experts recommend that you should ideally have around three to six months’ worth of income set aside, or even more in retirement. But this amount of savings is unachievable for many people, particularly at present when household bills are rocketing. Even if you know there’s no way you’ll be able to afford to put this much away, it’s better to try to save something rather than nothing, so that at least you have a bit of money to fall back on in an emergency. Read our article How to save money for tips on finding spare cash.
3. You’ll have savings to cover living expenses if you’re out of work
In an uncertain economic environment when there’s talk of an impending recession, you may be particularly worried about suddenly finding yourself unemployed, or without enough work to pay the bills. Having a savings buffer in place that’s earning a decent amount of interest could potentially cover your living expenses if you need to find a new job, as well as providing valuable peace of mind that you’ll have some money to fall back on.
It may be particularly difficult to build up savings at present, but it’s important to make sure you’re budgeting effectively, claiming what you’re entitled to, and reducing your household expenses where possible. Find out more in our articles Seven ways to pile on the pounds in 2023 and Budgeting if your income has reduced.
If you’ve a mortgage, and you’re sitting on your lender’s standard variable rate (SVR), you could save hundreds – or even thousands – of pounds by remortgaging. Interest rate rises are particularly painful for borrowers on variable rates, so speak to a broker and see if you can save some money.
4. You could be locking into the best rates now
When you’re choosing a cash savings account, consider whether you might need access to your money in an emergency. In this case most instant access savings accounts will enable you to make withdrawals whenever you want without penalty. However, if you’re willing to lock your money away for a set period, and are confident you won’t need to access your savings during this time, you could choose a fixed rate savings bond – and, generally, the longer the time frame, the higher the rate.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “You currently get more for fixing for three years than for longer. This is reflective of the mixed economic outlook, and the expectation that rates will rise for the short term but come down again in the future.
“It may be tempting to fix for a shorter period in order to snag a better rate but think carefully when you actually need this money. If you don’t want to spend it for at least five years, you might find savings rates are much lower when we get 12 months down the line, so fixing for one year may leave you earning less for the next four. It makes sense to start with the rate you want to fix for, rather than being swayed by what’s happening to rates right now.
“It may also feel tempting to wait and see before fixing – in case rates continue to rise. You may well be rewarded in the coming days. However, if the market has over-estimated the number of rises we need, then any sign of weakening inflation or trouble in the economy may depress rate expectations, and push savings rates down. It means it’s worth considering locking in higher rates sooner rather than later.”
5. You can get started with as little as £1
Remember, you don’t need to have thousands of pounds available to kickstart a savings habit. Even putting a small amount aside every month can make a difference over the long term. Lots of savings accounts can be opened with as little as £1, and once you’ve set up a direct debit that’s affordable for you, you can simply forget about it and leave your savings to grow.
Alternatively, if you’re happy to accept a level of risk and want to start investing in the hope of generating higher potential returns than deposit accounts can provide, you could think about putting some money into stocks and shares every month. Bear in mind though that investments can fall as well as rise, so there’s the risk you could get back less than you put in. Typically you should only think about investing if you plan to tie up your money for at least five years, but preferably much longer. Read more in our guide Investing – the basics.
Where to find the best savings rates
If you are in search of the best rates, check savings comparison websites such as SavingsChampion.co.uk, Moneyfactscompare.co.uk, uSwitch.com, or GoCompare.com.
You can also find more on the top rates in our articles Best instant access savings accounts. If you’re looking for a cash ISA, find the best rates in our article Best ISA rates – which cash ISAs pay the most interest? These and our other savings rate articles are updated weekly.
If you have money in a fixed rate savings account and you think you could do better elsewhere, check what the penalties are for closing your account. In some cases it may just be a few months’ interest and you may be better off moving your money to an account paying higher returns. You can find the current best fixed rate savings rates in our guide Fixed rate savings bonds explained.
When you’re choosing a savings account, make sure to consider whether you might breach your Personal Savings Allowance (PSA), which is the amount you can earn in savings interest without having to pay tax on this money. Read more in our guide What is the Personal Savings Allowance? This is £1,000 for a basic-rate taxpayer, and £500 for a higher-rate taxpayer. If you earn more than this, outside an ISA, then you will have to pay income tax, so it’s worth considering an ISA for your savings.
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