Can you believe that we are almost halfway through 2024? So rather than a Rates Rundown, I thought we'd do a Rates Roundup for the year so far! Although the rate rises that we have seen this year have slowed down compared to the previous couple of years and we have even seen some falls, with inflation coming back down to close to the government target, savers are now able to find hundreds of savings accounts that pay an interest rate that is higher than the current rising cost of living.
Bearing all this in mind, incredibly, the latest statistics from the Bank of England show that there is over £253 billion sitting in current accounts and savings accounts that is earning no interest at all – with top rates paying 5% or even a bit more, that is potentially £12.65 billion of gross interest that is not being claimed by savers. In addition, there are still savings accounts paying less than inflation – so now really is the time to move your money if you have cash languishing, earning less than inflation.
So, let’s take a whirlwind look at how the savings market has performed so far this year, what is still available and how inflation affects cash savings.
If you think you’ll need access
to your money, an easy access account is a wise choice.
Because the base rate cuts that we have been waiting for are yet to have started, the top rates on offer are still paying almost as much as they were at the beginning of the year. And considering the rate of inflation, as measured by the Consumer Prices Index (CPI) has fallen from 4% in the 12 months to January 2024, to 2.3% in the 12 months to April this year, there are now hundreds of accounts to choose from that can keep up with the cost of living, even if you are a taxpayer.
If you pay basic rate tax and you are fully utilising your Personal Savings Allowance, you’ll need a pre-tax interest rate of 2.88% or more to keep up with inflation at its current level. If you are a higher rate taxpayer, it’s 3.8% but that is still easily achievable, with over 43% of live easy access accounts paying at least 3.80% (based on a balance of £50,000) - whilst more than 60% are paying 2.88% or more. That said, if you have your cash on deposit with one of the high street banks, you could be disappointed.
The Barclays Everyday Saver is paying just 1.66% AER (before the deduction of tax) on the first £10,000 in its Everyday Saver. If you have more, the interest rate you earn is diluted as the balance above £10,000 will earn just 1.16% AER. And HSBC’s Flexible Saver is paying just 2% on all balances from £1. Well below inflation.
Of course, easy access account rates are variable, which means that when the base rate does start to fall, you can expect the interest rates on these accounts to come down too.
There is a strange phenomenon with fixed term bond rates at the moment, in that the longer you tie up your cash for, the lower the interest rates on offer. Normally you’d expect to be rewarded for tying up your cash over the longer term.
The reason for this anomaly is that we are expecting the next move for interest rates to be downwards. As a result, providers don’t want to offer interest rates today that will be far above the market price in a year or so’s time.
That said, as the expected date for the base rate to be cut keeps being pushed back, we have seen some rate increases on the top long and short-term bonds recently, although overall, the rates you can achieve today are lower than they were earlier in the year.
Back in January this year, the average of the top five 1-year bonds available was 5.35%, with the top rate on offer paying 5.50% AER. Fast forward to today and the average is 5.18% with the top rates paying around 5.20% AER.
Not a huge drop and considering how far inflation has come down, it’s a savers’ dream at the moment. You can lock up your money and earn an interest rate that is outpacing inflation.
Interestingly the longer-term bond rates have held up better. At the beginning of the year, the top 5-year rate on offer was 4.75% - today it’s 4.60%. And the average of the top five is almost the same - 4.57%, down from 4.58%.
2-year and 3-year rates have fallen harder, although you can still earn up to 5.06% fixed for 2-years, whilst you can earn up to 4.80% fixed for 3-years. The average of the top five has fallen from 5.23% to 5.03% for 2-years – but things have improved recently. The top five 2-year bonds are all paying 5% or more, whereas at the beginning of the month only the top two were in the 5% club.
It’s a similar story in 3-year table – the average has gone from 4.74% a couple of weeks ago, to 4.77% today, although this is still down from 5.01% at the beginning of the year.
Assuming inflation continues to keep lower, if you are able to lock up some of your cash for longer, you might feel very pleased with yourself further down the line that you continue to earn above inflation and have hedged against falling interest rates for the term of your bond.
Of course not everybody can lock up their cash and with the majority of fixed term bonds there is NO access at all to the money before maturity – not even with a penalty. So, these accounts are not appropriate for anyone who might need access.
The good news is that fixed term ISAs do offer access, albeit with a hefty penalty, but this added flexibility plus the tax-free interest have made ISAs very popular once again. Let’s take a look at what’s been happening to ISAs this year.
A frequent complaint that I hear from savers is that the tax-free rates on ISAs are usually lower than the pre-tax rates on the equivalent non-ISA accounts – and this is particularly true with fixed term accounts.
For example, at the moment the top 1-year ISA is paying 5.05% (although you do need to open a current account with the provider – Virgin) - whilst as we’ve mentioned above, the top 1-year bond is paying 5.21% AER.
However, if you are a taxpayer and have fully utilised your Personal Savings Allowance (PSA), the interest rate you would earn on the bond after the deduction of tax would be 4.16% for basic rate taxpayer or 3.12% if you are a higher rate taxpayer.
It’s the same with the longer-term ISAs too – if you deduct tax from the top 5-year bond paying 4.60%, the net effect is 3.68% for a basic rate taxpayer – or 2.76% for a higher rate taxpayer – still more than inflation but far lower than the top ISA rate which is 4.17% at the time of writing.
As many more savers are paying tax on their interest once again, cash ISAs are more popular than ever as the tax-free rate of the ISA can still be considerably more than the interest earned after tax has been deducted on the non-ISA bond equivalents, so for many the ISA allowance is not to be disregarded.
As with the fixed rate bond markets, rates have tumbled a little over the year, but as illustrated above, the rates on offer are still worth a look.
How does inflation affect savers?
Ronald Reagan famously said that inflation is “as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”
Quite simply, inflation can be a silent killer for savers, as although your deposit is secure and won’t fall in value, if the interest you earn is less than the rising cost of living, your spending power is becoming less and less, meaning that you may need to dip into your savings in order to continue to maintain your standard of living.
But the good news is that with interest rates holding pretty steady since the last base rate rise in August 2023, and inflation falling from a high of 11.1% in September 2022, to 2.3% for the 12 months to April 2024, things are looking better for savers. That said, of course they have taken a terrible bashing over the proceeding couple of years.
But, with plenty of accounts that can keep up with, and even beat the current rising cost of living, if you are not earning what you could be, you are throwing money away, and could even be losing the purchasing power of your cash if you are earning less than inflation.
For example, if you have £50,000 in an account earning nothing, with inflation at the current level of 2.3%, after five years, although it would appear that you still have £50,000 in your account, the real value after the effect of inflation would have reduced your spending power to the equivalent of £44,626. However, if you had that cash in an account earning 4% net of tax (or in a tax-free ISA), not only would the total balance have increased to £60,833 after five years, including accrued interest, but more importantly the real value would have grown too – giving you spending power of £54,295, so more than keeping up with inflation.
This clearly illustrates why keeping your cash in the best accounts is so important. Even though the interest rates on offer today may look lower than they have been in the recent past, in real terms you are likely to be better off now – especially if you choose the top savings rates.
@savingschampion
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