Get your savings pot kettled in the black
About a week ago, the Bank of England raised interest rates by 0.25 percentage points to 4.5% in a further bid to tether inflation, which is floating around 10%.
The target for inflation is just 2% and the BoE says that’s achievable, maybe, by late 2024.
As you know, the interest rate influences the price we pay on credit, loans and mortgages. So with high inflation hurting our spending power, and interest rates biting our debt, it altogether looks like another blow to our pockets.
Released this week, the LifeSearch Health, Wealth & Happiness report suggests that the average Briton will be £233 per month worse off for the foreseeable, and this figure increases to £367 per month if you’re between 18 and 34 years old.
But, but, but …
Interest rate hikes pull up the cost of borrowing but that’s not all they do. Interest rates also fertilise our savings pots so theoretically now is a good time to stash cash.
Some providers now offer rates at a whopping 7% … though there are strings attached, as you’ll read in the next section.
By now you know we at Money Means are big advocates of taking control of your money and saving for tomorrow is a key component of that. But so too so are thinking deep and shopping hard before you move your savings to the right place for you …
Because it’s not necessarily about picking the account with the biggest rate. It’s not that simple. The best savings account for you starts with you, your money, and your needs. The best choice for you hangs on how you save, how much you plan to save, and how readily (or not) you’ll need to access your funds.
Regular savings accounts
Regular savings accounts generally offer higher rates (the aforementioned ~7%, for example) than fixed or easy-access accounts, but there are heavier Ts&Cs.
For example, the saver may have to be an existing customer to access the mega rate. The saver will likely have to deposit (above) a specific amount each month and withdrawals will be frowned upon. While it’s perfectly possible to miss your target payment or make a withdrawal, both may result in a penalty … like your interest payments being docked.
It’s likely that the glossy headline rate will last only a year or two so you need to be prepared for that. Oh and the actual interest you’ll receive will, in reality, be roughly half of the advertised rate. It’s not a scam it’s just the maths of it.
Nonetheless, regular savings accounts are a good option for people who can commit to saving at a certain level, won’t miss the cash, and won’t make sudden withdrawals.
Easy access savings accounts
Compared to regular savings accounts, easy access ones offer lowish interest rates (right now let’s say ~ 3.70% at the top end) and those rates are variable. They go up and down.
Here, too, you need to keep an eagle eye on promotional rates as they may expire, and you’ll want to be ready to shift your cash from this account to that one should your rate start to lag behind the rest of the market.
Starting an easy-access savings account may not require any more than £1, and there aren’t usually any stated monthly targets. The main upshot, as the name suggests, is that you can access your cash without a fuss … although some providers do have limits.
Easy access accounts work if you’re unsure how much and how often you’ll contribute, and if it’s likely you’ll need to get your paws on your pounds without a fuss.
Fixed savings accounts
Fixed savings accounts offer higher interest rates (right now let’s say ~ 4.50% at the top end) than easy access accounts.
The higher rate is, essentially, the payoff for the customer agreeing not to withdraw for a stated period of time. Usually, the longer the term you agree to then the better the interest rate … but right now there’s little difference between one year rates and five year rates.
Remember, too, that the longer you fix the longer you can’t switch to a better deal.
Lastly, there may be tax implications here too. Fixed accounts often pay interest all at once at the end of the term. If you’ve a multiyear term it could mean a fair big chunk of money comes your way in one go, hence it could take you over your personal savings allowance (£1,000 for basic-rate taxpayers and £500 for higher rate taxpayers).
Fixed rate accounts are a good option if you definitely, definitely won’t need access to your pot for a considerable period of time.
Fixed cash ISAs
Fixed cash ISAs are an alternative for those who want rate security but want to keep just in case access open. By law, ISAs have to grant withdrawal requests.
ISA rates have changed significantly in the last couple of years and, right now, you may be able to fix yourself to ~4.3%. This is solid. But do note that withdrawing funds early, though it’s your right to do, may result in a penalty. Always check the small print.
Fixed cash ISAs balance the security of a good fixed rate with easy contingency access.
As always it’s about you …
When it comes to savings accounts, your first move isn’t shopping around but recognising what kind of saver you are and will be. It’s being honest about how you’ll behave in the months and years ahead, and probably hangs on whether or not you have accessible emergency funds.
If you’re confident you can contribute a lot for a while then that’ll set you down one savings road. If you need to retain just in case access then that’ll send you down another.
When shopping for accounts, remember to see what your current bank has to offer. They may have exclusives and perks for loyal customers like you.
If not, many price comparison websites keep real-time charts showing different providers’ rates, often with pros and cons / dos and don’ts for each account.
Take control. Times are lean … but your money can always work harder.