It has not been the easiest few months for savers. Rates were already languishing before the coronavirus pandemic, but now they are racing quickly to to the bottom.
Two Bank of England base rate cuts and an economic shutdown, along with people piling money into the safe haven of savings accounts, has resulted in the perfect storm for rates to fall drastically.
Best buy easy-access rates have fallen below 1 per cent, while fixing doesn’t offer much more than that.
Some households may have found themselves better off during the lockdown and developed a savings habit almost by accident
Although some may think it’s not worth saving at the moment, having a savings pot to fall back on has never been so important – even if the rates you receive for parking cash isn’t great.
Getting into the savings habit is essential to financial security, no matter how low the rates on offer are. We explain why and how to hunt out the best deals.
Why have rates fallen?
Since March, savings rates have fallen off a cliff. Average easy-access rates fell from 0.59 per cent in January to 0.26 per cent in June, a record low.
And average one-year fixed-rates fell from 1.2 per cent to 0.86 per cent over the same period.
There are several reasons why savings rates have tumbled. The Bank of England base rate being cut from 0.75 per cent to 0.1 per cent in mid-March, a record low, is one.
Although savings rates have long been decoupled from the base rate, it does still affect how much banks pay savers because it determines how much the Bank of England pays them for the money it holds.
A lower base rate means banks earn less from the Bank of England, making it more expensive to pay savers decent interest.
This is why big banks always react to a base rate cut by slashing their own rates.
Coupled with this is a cheap funding scheme launched by the Bank of England, designed to provide banks with funding at that record low base rate.
With bank lending outside of emergency loan schemes also down, banks have less need for savers’ money.
The Bank of England cut its base rate to a record low of 0.1% in mid-March in response to the coronavirus
There is no need for a bank to pay a saver 1.5 per cent interest on their cash when they can get it from the Bank of England at 0.1 per cent.
And lastly, many of the banks which offer the best rates are smaller banks, which cannot sustain the influx of money which comes from offering them for very long.
They cut rates, and in response other banks do the same thing, and you end up with a spiral which sometimes only stops when a bigger bank is there to act as a buffer.
Hopefully, with Treasury-backed bank National Savings & Investments offering the best easy-access accounts and one of the best easy-access tax-free Isas around, it might do just that and easy-access rates will stop tumbling for now.
How long this lasts for though remains to be seen.
Those who can afford to save have swollen their balances during the lockdown months. But it’s important to keep that savings habit going even when life returns to normality
Why it’s still important to save
Interest is a reward – albeit an increasingly small one – for saving and not necessarily the main reason to do so.
Many households will have effectively lucked into a savings habit over the last few months by virtue of the lockdown, with an estimated £182 of spending a week on average prevented.
And the Bank of England found a record £25.6billion was tucked away by households in May, meaning a collective £56.6billion has been stashed between March and May during the height of the coronavirus pandemic.
If you’re one of those lucky households, it’s important to keep that going, if you can. Whether it’s a busted microwave or something as serious as losing your job, an experience many are unfortunately bracing themselves for, experts always tout the important of having a cash safety net or an emergency savings pile, usually of several months’ outgoings.
And given the current crisis, it’s perhaps a message that many more will take to heart.
Experts often recommend working out how much you can save and transferring it out the day you’re paid or setting a direct debit.
Why it’s still important to switch
If rates are at record lows, then what is the point of saving? As with any average, some banks will be offering more, and some a whole lot less.
The UK’s biggest banks regularly now pay just 0.01 per cent interest, or just £1 on every £10,000 of savings.
Industry data which covers banks including the UK’s biggest high street names found £176billion, or more than a third of savers’ money, earns just 0.1 per cent interest.
Not only does this let the big banks get away with paying savers nothing as they have billions in cheap money sitting around, but it costs savers money too.
Moving £10,000 from an easy-access account paying 0.01 per cent to NS&I’s easy-access account paying 1 per cent would see you earn £99 more a year in interest.
Millions of people cost themselves hundreds of pounds a year in lost interest by leaving their money in old accounts with high street banks paying little interest
It is worth noting that there is very little premium for locking your money away for longer than a year at the moment, so an easy-access, time-limited notice, or regular savings account which lets you put away a certain amount each month is likely the best choice.
It is easy enough to switch accounts, you simply open a new one on the provider’s website or one of the other ways they offer, withdraw and close your old account and transfer your savings into the new one.
What about Isas?
Rates on tax-free deals are being hit even harder than standard savings accounts.
The best rate is 0.9 per cent, with no account at all paying 1 per cent.
And an allowance which lets basic rate taxpayers earn £1,000 interest a year tax-free, and higher ratepayers £500, have also resulted in people questioning whether they are worth it.
This is because the main selling point is that all interest is tax-free, and with rates low it’s unlikely many will be earning enough interest to pay tax.
|Average easy-access Isa rate|
But Isas, which have a £20,000 annual allowance each tax year, will likely see their rates improve at some point in the future, and the 21-year-old tax wrapper is less likely to be cut than the Personal Savings Allowance.
Savers with multiple years’ Isa savings are also able to carry over previous allowances by transferring them, as you can normally only pay into one cash Isa each year.
You can choose to transfer old pots in full or just a percentage of them, which might be an idea for those with more than £85,000 saved, the maximum covered by the Financial Services Compensation Scheme.
Savers with Isa allowances from previous years can often transfer them into better-paying accounts without the money losing its tax-free status. But you must stick to the rules
Not all banks accept transfers, including NS&I, which offers the best easy-access Isa paying 0.9 per cent, so it is important to check.
It is also important to check if there are any transfer fees, as this could eat into your interest.
You must be sure to check the terms and conditions of your account to avoid penalties, and remember not to withdraw your money yourself, as that will strip it of its tax-free status.
The ongoing coronavirus crisis also means banks may take longer to process transfers, so be wary of that.
How to hunt down the best deals
This is Money’s independent best buy savings tables are updated daily with the latest rate cuts and changes.
In the meantime, these are the best rates available:
Easy-access: NS&I Income Bonds – 1.15 per cent
Notice account: BLME 90-day notice – 1.1 per cent
Regular savings account: Coventry Building Society – save up to £500 a month – 1.85 per cent
One-year: Al Rayan Bank – 1.11 per cent
Two-year: Al Rayan Bank – 1.41 per cent
Easy-access (without a catch): Cynergy Bank – 0.9 per cent
One-year: Metro Bank – 0.9 per cent
Two-year: Metro Bank – 1 per cent
When you have opened an account with new money or transferred old pots, it is important to set up alerts to check your rate every few months.
Banks and building societies will notify you of rate changes, but these can be easily cast aside or not read properly.