Interest rates may have been kept on hold this week, but the direction of travel is clearly downwards, with savers being urged to check the returns they are getting and switch to a better deal now if their rate isn’t competitive.
On Thursday, the Bank of England kept its base rate at 5% after cutting it in August, though many economists think there will be another cut, to 4.75%, at the next meeting on 7 November, plus maybe a few more next year. However, the “painful” budget taking place on 30 October adds a fair bit of uncertainty to the mix.
“With interest rates on a downward trajectory, the message to savers is simple: get your skates on and secure the best savings deals while you still can,” says Myron Jobson at the investment platform Interactive Investor.
Consider fixing
For those able to tie up some cash for a little while, many experts were urging savers to “fix now to avoid further falls”. The average one-year fixed-rate savings bond currently on sale is paying 4.43%, which is down from 4.63% in August and 5.34% a year ago, the financial data provider Moneyfacts said this week. With these accounts, savers have to lock their cash away for a period of time, but their returns are guaranteed.
Further interest rate cuts later this year are likely to hit the easy-access savings account market the most, reckons Mark Hicks at investment platform Hargreaves Lansdown. “Fixed rates are still the best option for anyone who doesn’t need the money close at hand. They offer similar rates to the easy access market, and mean savers can lock in these rates for the entire fixed period,” he adds.
The good news is that the top-paying one-year fixed-rate bonds were at the time of writing paying up to 5%, though the providers at the top of the best-buy tables – this week, they included Mizrahi Tefahot Bank (via the Raisin platform) and Union Bank of India (UK) – are often not household names.
Rachel Springall at Moneyfacts says that whichever account savers choose, it is vital they explore “the more unfamiliar brands,” as so-called challenger banks currently pay some of the best rates.
The cuts already announced
Savings rates have been coming down over the past few weeks, and there are more cuts taking effect over the next few days that are directly linked to the 1 August reduction. That is because it can take a few weeks for banks and building societies to change their savings rates.
For example, on Wednesday (25 September), TSB is trimming the rates on a number of its most popular accounts including Easy Saver, Cash Isa Saver, eSavings and Young Saver. For example, Easy Saver currently pays 1.4% on up to £25,000, or 1.5% if you include the 0.1% introductory interest bonus, and those rates are being reduced to 1.3% and 1.4% respectively.
On 11 September, NS&I cut the interest rates on its “British savings bonds” – and these probably won’t be the last reductions we see from the UK government’s savings bank. The British savings bonds are rebadged versions of NS&I’s guaranteed growth bonds and guaranteed income bonds and offer a fixed interest rate over two, three or five years. The growth bonds had paid up to 4.6%, but this maximum rate – for those tying up their cash for two years – was reduced to 4.25%.
There are better rates than that out there: on Thursday there were two-year fixed-rate bonds available paying up to 4.7%.
However, if you have a very large sum that you need to stash somewhere – for example, the proceeds of a house sale or an inheritance – these NS&I bonds have one big thing in their favour: you can invest up to £1m per person in each bond.
As NS&I says, “most banks only guarantee your savings up to £85,000,” whereas it is backed by the Treasury and is “the only provider that secures 100% of your savings, however much you invest”.
Remember Isas
With warnings of tax pain to come in next month’s budget, it is no wonder that cash Isas have been flying off the shelves. In the 2024-25 tax year, the most you can save in Isas is £20,000. Any interest you earn is all yours, while with a standard non-cash Isa savings account, you may have to pay some tax.
In recent years many people decided not to bother with cash Isas because the personal savings allowance means basic-rate taxpayers can receive £1,000 of interest each financial year without paying any tax, while higher-rate taxpayers can receive up to £500. But with some non-Isa accounts still currently paying 5%-plus, there will be plenty of savers with reasonable sums tucked away who will go over these limits and be hit with a tax bill for their savings interest (for many, this will be done via a deduction made from their payslip each month).
Almost 2.1 million people are expected to pay tax on their savings this year, up from about 650,000 three years ago, according to new figures obtained by investment platform AJ Bell.
Also, the government could in theory reduce Isa tax breaks on 30 October.
So if you are not using your Isa allowance, or only using a bit of it, now is the time to act. Remember that you can sign up to multiple cash Isas during one tax year, provided the overall maximum Isa allowance is not breached.
“Many people leave opening an Isa to the final months of the tax year, but if you have the cash available to bring this forward to before the budget, it really does make sense to do so early this year,” says Jason Hollands at wealth management firm Evelyn Partners.
Getting into the habit
Regular savings accounts offer some of the best interest rates. Typically, you put aside some money each month for a limited period of time.
Earlier this month Yorkshire building society launched one that pays an impressive 8% interest, and it is available to all UK residents aged 16-plus. The maximum savers can pay in is £50 a month for 12 months, and the Yorkshire will allow money to be withdrawn on three occasions throughout the year without penalty [see footnote].
• This footnote was added on 23 September 2024. After publication, the 8% regular saver account from Yorkshire building society referred to in the article was withdrawn from sale, and it is no longer available.
