Cashing in on savings?

Post by Mearns & Company in News

 The era of near zero interest rates is ending, but are your savings benefiting?

The Bank of England raised its base rate for the fifth time in six months at its June meeting, pushing the figure up to 1.25%, and it has since increased to 2.25%. For the past 13 years the rate has averaged about 0.5%, oscillating between 0.1% and 0.75%.

The Bank’s ratcheting up of interest rates has started to permeate through to the interest paid on savings, although it has often been loan rates (for example, variable rate mortgages) which have increased earlier and faster. Unfortunately, you cannot assume that your existing savings accounts have benefitted from the rise in the base rate since last December.

Periods of rising interest rates have traditionally been an opportunity for banks to expand their margins by widening the gap between what they pay depositors and charge borrowers. They now have their first real chance to do so for well over a decade.

Missing out?

This strategy can be seen most clearly when it comes to accounts that are no longer open to new savers. For instance, the rate on Halifax’s closed 60 Days Gold account remains at the 0.01% level to which it fell in July 2020. Switch the money across to a Halifax Everyday Saver account and the interest rate is 0.25% (as of 14 June 2022), with instant access. Even National Savings & Investments (NS&I) is not immune: it also offers a miserable 0.01% on its legacy Investment Account, while its Direct Saver account and Income Bonds pay 0.5%.

At a time of economic uncertainty, when you may wish to build up your cash reserves, you need to look beyond the familiar brand names if you are to find a return that beats the Bank of England base rate rather than one that sits well below it. Currently the best instant access rates are around 1.3%, often from Sharia-based accounts which pay expected profit rather than interest.

Contrary to what you might expect, cash ISA rates may be lower than non-ISA rates. NS&I again provide a good example: their Direct ISA pays 0.35%. While an ISA offers freedom from income tax, in practice the personal savings allowance means you can earn £500 interest tax-free if you are a higher rate taxpayer (£1,000 if your top rate of tax is less).

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

Tax laws can change.