The UK CPI inflation rate climbed to 0.50% in September, reflecting an increase in prices by restaurants and cafes, following the end to the Eat Out to Help Out Scheme. September also saw a boost in the sale of second-hand cars, which added to the rising costs, as people either strive to avoid public transport with the purchase of a new car, or are looking for a better model having built up a healthy savings balance during the first lockdown.
Chief UK economist at Pantheon Macroeconomics, Samuel Tombs, said that while inflation picked up after the temporary drop in August, it “likely will not rise materially further this year, thanks to looming falls in energy and goods prices”.
And while this hike saw CPI increase to 0.50% from 0.20% - it is still significantly below the 2% target, which could support a case for further monetary policy by the Bank of England to continue to prop up the economy – especially given the resurgence of coronavirus cases and a second National lockdown.
Although the recent Monetary Policy Committee (MPC) meeting saw the base rate left at it’s historic low of 0.10%, as we have recently reported, the threat of zero or negative interest rates remains very real – to the extent that the Bank of England’s Prudential Regulation Authority CEO has recently written to banks to find out how they would cope if a negative or zero interest rate was implemented.
While this has not occurred yet, in the meantime the MPC has announced another £150bn in quantitative easing – bringing the total amount of the debt of the UK to £875bn – which equates to about £27,000 per UK taxpayer – just under the average UK salary.
What can savers do?
The ongoing challenge for savers is that a continued and relentless drop in savings rates that has continued ever since NS&I announced back in September that it will be cutting its once best buy rates to the bone at the end of November, means that we need to work harder than ever to try and keep our cash savings from being eroded by inflation. And in fact, anyone who continues to hold these NS&I accounts once the rates fall will, in effect, being receiving negative interest in real terms (taking into account the rate of inflation) so it’s even more important for these savers to shop around.
That said, around 60% of all on-sale savings accounts are paying 0.50% gross/AER or more – so there is currently plenty to choose from that will mean your cash can keep pace with the current rate of inflation.
However, as we frequently report, leaving your cash with a high street bank (or NS&I) will see your hard earned cash eroded as these providers are paying rates as low at 0.01% - so hardly anything at all.
On a balance of £50,000 that means earning just £5 a year in interest.
More importantly, even with inflation at just 0.5% the real value of your money after 12 months would have fallen to just £49,756. After five years, your £50,000 would be worth just £48,793 in real terms.
However, if you were to choose a more competitive rate of interest, there’s currently no need to accept your money falling in real terms. If you were to deposit your £50,000 into the Atom Bank or Gatehouse Bank easy access accounts paying 0.75%, you would earn £375 in interest over 12 months and your capital plus the interest would still be worth more in real terms. After one year the real value would be £50,124 and over five years £50,625 – more than £1,800 more than leaving your money with the high street bank.
Even the high street bank fixed rate bonds pay pitiful amounts. Santander is paying just 0.15% gross AER fixed for 12 months – far lower than inflation. However, there is simply no need to put up with that. Over 80% of the Fixed Term Bonds and Fixed Term Cash ISAs match or beat inflation – and by locking into a fixed rate account, at least some of your cash could be protected from any further rate cuts that will inevitably occur to variable rate accounts.
Currently the best 1 year fixed rate bond available is with Tandem Bank and is paying 1.05% AER - over 12 months you could earn £525 gross interest – and in real terms your £50,000 would have increased to £50,274 instead of dropping to £49,826 if you leave it to fester with a Santander.
Other top savings tips
There are some other things that you might want to consider in order to squeeze out as much interest as you can.
- Regular Savings accounts often offer higher rates than standard deposit savings accounts as the amount you can deposit is restricted. There are usually T&Cs to be aware of too and the very best Regular Savings accounts on the market are linked to holding a current account with the same provider. For example, First Direct, HSBC and M&S Bank all pay 2.75% on their 12 month term Regular Saver accounts. But the maximum you can deposit is £300 pm with First Direct and £250pm with the other two. The best Regular Saver account that is open to anyone is with Coventry Building Society. The Regular Saver (3) account is paying 1.55% gross/AER (although this is a variable rate, so could be cut) and you can deposit up to £500 per month for 12 months.
- Sharia Banks are offering some of the best rates on the market at the moment. Sharia Banks operate within Sharia Law, therefore they pay a profit rate rather than an interest rate, although from a saver’s perspective, there is little difference. Gatehouse Bank, has one of the best easy access accounts, paying 0.75% AER and Al Rayan Bank is paying 1.08% on its 12 Month Fixed Term Deposit. For more information on Sharia Accounts, read our recent article Market-leading accounts with an ethical difference – although please note that the rates on offer have changed since this article was published. For the current best buys take a look at the Sharia Fixed Term Account table as well as the normal Easy Access and Notice Account tables.
- If you are eligible to open a Lifetime ISA, you could earn a government bonus of 25% on each deposit made. So, if you were to deposit the maximum £4,000 each year, a £1,000 bonus would be added – dwarfing any interest that you can earn on any cash savings accounts. Unfortunately many of us will not be able to take advantage of such a generous bonus as you have to be aged between 18 and 39 years old to be eligible – and even if you do qualify it’s important to understand that you can only retain the bonus if you use the funds to either purchase your first home – or keep the account until you are 60 years old.
If you’re dismayed and disillusioned with low interest rates and would like to speak to us about your future financial goals and returns why not get in touch and see if one of our expert independent financial advisers can help. It could be time to explore the possibility of moving at least some of your money away from cash in order to make it work a little harder. However, it’s vital to make sure you understand just what risks there may be with any other types of investment, which is why speaking to an expert is crucial.
We’re currently offering all those with £100,000 or more in savings, investments or pensions a FREE future planning review with one of our TPO colleagues, worth up to £500. You can find out more here.
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