With the Bank of England base rate on hold for the first time in nearly two years, it’s really important not to wait too long to review and improve your cash savings. So, we thought we’d bring you some top tips to making your cash work as hard as possible, especially if the next move for interest rates is down.
At the last Monetary Policy Committee (MPC) meeting, on 21st September, five out of nine of the committee members voted for the base rate to remain at 5.25%. This was mainly attributed to better than expected inflation statistics, with the Consumer Prices Index (CPI) actually falling slightly from 6.8% in the 12 months to July 2023, to 6.7% in August. This was a surprise as it had been widely predicted to actually rise slightly.
Of course, even if the base rate has peaked now, that doesn’t mean that it will fall again anytime soon. In fact, although the latest predictions expect the base rate to peak at a lower level than previously expected, there could still be one or two more hikes on the horizon. And in terms of when things might start to fall again, the latest prediction is that things will pause for a while once peaked, before falling back slightly over the next five-years. No-one expects rates to fall anywhere close to as low as they had been two years ago though – currently the expectation is for a low of around 4%.
Top tips for making your cash work harder
Review, ditch and switch
While over the last couple of years it’s fair to say that the majority of savings accounts have seen some sort of rate improvement, by no means all have and the amount of base rate increases that savers have benefitted from varies wildly from provider to provider and account to account.
For example, the best rate on offer at the beginning of December 2021, before the base rate started to increase, was the Aldermore Double Access Saver Issue 1 and at that time it was paying 0.75%. Today that account is paying its customers a very healthy 4.90% AER. On the other hand, the Santander Everyday Saver was paying 0.01% and is today paying just 1.20% AER.
And worst still, Virgin Money has some accounts that are still paying 0.25% AER – they have not seen an increase AT ALL over the last couple of years. If you have £50,000 in one of these Virgin accounts, you could improve your pre-tax interest by £2,475 by switching to the top easy access account paying 5.20% AER
So, you can’t be sure your provider is offering you good value. Now’s the time to review your existing savings accounts and see if you can do better.
Is now the time to fix?
The pause in the Bank of England base rate hikes at the last MPC meeting is a clear indication that the current interest rate cycle is likely to be close to, if not already at the top. As a result, we are getting a lot of people questioning whether now is the time to lock some cash away at a fixed rate.
Well, I would say that now is the time to do so. There’s no need to put all your eggs in one basket, but if you have been waiting for better rates before committing, you may well miss out if you wait much longer. The introduction of the NS&I 1-year bond paying 6.20% shocked the market, as things were actually slowing and indeed beginning to fall and as a result there was a bit of renewed competition. Once that bond is withdrawn, we could quickly see the market settle back down and the rates start to wane slightly.
This is already the case with the longer-term bonds. Don’t ignore these, by the way, just because they are paying a little less than the shorter-term bonds. If you do lock some of your cash away for, say 5 years at the current top rate of 5.80% AER, if inflation continues to slow and interest rates do start to fall in the next year or so as markets are suggesting, you could find yourself in the enviable position of even earning more than inflation for at least some of the term of the bond. The best idea is to have a mix. Easy access for any money that may be needed in a hurry, short term fixed rate bonds to boost the interest you are earning right now and longer-term bonds to hedge against interest rates falling.
ISA ISA baby
While borrowers are feeling the effect of rising interest rates in a negative way, it’s been great news for savers as the amount of interest you can earn has soared. However, as a result, more than a million more savers are expected to pay tax on their savings as they are now breaching their Personal Savings Allowance (PSA). Basic rate taxpayers can earn up to £1,000 a year before they need to pay tax on the interest from their savings accounts – higher rate taxpayers have a PSA of £500. But with interest rates increasing, this allowance is being breached with lower and lower deposits. In December 2021, before the base rate started to increase, the best easy access account available was paying 0.75% AER. This meant that you would need a deposit of more than £133,000 to breach the basic rate taxpayer PSA. With top rates now paying 5.20%, just £19,231 will breach the allowance. And for those looking to lock into the top 1-year rate of 6.20%, just £16,130 will breach the £1,000 PSA.
As a result, ISAs are a good idea for those who can no longer avoid paying tax on their savings, even though in many cases the rate would appear to be less on the ISA than the equivalent taxable account. But you need to take a look at what you would earn after tax on the standard account, compared to the tax free interest on the ISA.
For example, the best taxable easy access account offering unlimited access is paying 5.20% gross/AER – but this falls to 4.16% after the deduction of basic rate tax. The top easy access cash ISA, on the other hand, is paying 5% via the Moneybox app. Moneybox is not a bank, so the money is actually split between Santander and HSBC.
Similarly, the rate of the NS&I 1-year Guaranteed Growth Bond, after the deduction of 20% tax is 4.96% net, whilst the best 1-year cash ISA is paying 5.86% with UBL UK. On £20,000 that’s a gain of £180!
Everyone aged 16 or over has an annual ISA allowance, which is currently £20,000. It’s time to use it or not only will you lose this year’s allowance, but you could also be missing out on more interest.
The couple’s tax tricks
Paul Lewis, freelance financial journalist and the presenter of BBC Radio 4’s Money Box wrote a really interesting article in the Telegraph recently. He called it the couple’s tax trick, which I have borrowed (with his blessing!)
The gist is that if as a couple, one is a far higher earner than the other, then it can make sense to switch savings from the higher earner to the lower, in order to keep tax paid on the savings to a minimum. There are a couple of allowances that may be available for those on a lower income but not for those on a high income;
Starting Rate for Savings
If you are receiving less than £17,570 each year in total either from employment, as a pension income or rental income you can earn up to £5,000 in savings interest before paying any tax on it. But this can be quite complex to calculate. If you earn more than the Personal Allowance which is currently £12,570 but less than £17,570, the £5,000 allowance will be reduced by £1 for every £1 you earn over the Personal Allowance.
For example:
You are paid a salary of £16,000 by your employer. Your Personal Allowance is £12,570. Your salary has fully used all of your Personal Allowance.
The remaining £3,430 of your salary (£16,000 minus £12,570) reduces your starting rate for savings by £3,430. This means that you have a remaining starting rate for savings of £1,570 (£5,000 minus £3,430).
If your income is less than £12,570 then you have the whole £5,000 starting rate for savers to make use of as well as any remaining Personal Allowance.
Personal Savings Allowance
This allowance is in addition to the starting rate for savings. Basic rate taxpayers can earn £1,000 in savings interest per year tax free, whereas this allowance is halved to just £500 for higher rate taxpayers and additional rate taxpayers receive no PSA at all.
Of course it’s not always that straightforward so you might need to check with your accountant and financial adviser if you are looking to switch your cash to be more tax efficient.
Take the simple solution
We know that for savers with amounts of more that the Financial Services Compensation Scheme (FSCS) limit of £85,000, it can be too much hassle to open and monitor multiple savings accounts. As a result, these savers will often leave their cash languishing in poor paying accounts and much of their cash my be at risk should their provider fail. But with interest rates at their highest for well over a decade, doing nothing could be costing you thousands of pounds.
The good news is that technology is helping to end savers inertia. Cash Savings Platforms could be the solution to make it quick and easy to review and open new better savings accounts.
The real beauty of these platforms is mainly the simplicity, as many people are put off by the thought of all the admin that comes with opening and managing multiple savings accounts.
With a cash platform, at the click of a button you can switch when a new, improved account comes along or when your bond matures, without the need to fill in yet another application, with a new login and/or password to remember and more security questions and ID checks to fulfil. You apply once and the rest is history, so to speak.
This saves time for those trying to trawl the market looking for the best savings deals and then applying for each account individually, and reduces administration and paperwork, as everything a saver needs – annual interest statements, a summary of their cash positions etc – is provided in one single, secure place.
We’ve been busy here at Savings Champion creating our own solution for savers who are looking for a simple way to open and manage multiple savings accounts in one convenient place – keeping your cash working hard whilst being fully protected by the Financial Services Compensation Scheme (FSCS).
Our new Savers Hub is a cash platform, with a large selection of competitive savings accounts all in one place.
Why not take a few minutes to find out what kind of returns you could expect on your savings.
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