Whilst the Bank of England frustrated millions of homeowners by keeping the base rate steady at 5% at the most recent Monetary Policy Committee (MPC) meeting, it’s likely that there will be a rate cut at either or both of the final two meetings this year, on 7th November and 19th December. Analysts predict that not only is the base rate likely to fall to 4.5% by the end of this year, but it could fall to as low as 3.25% by the end of next summer.
This will no doubt be a huge relief to mortgage holders, but it will be disappointing for savers – the beginning of the end of the good times!
What can savers do to protect themselves?
Review, ditch, switch and fix!
Although we've already seen a slight dip in fixed-term bond rates over the past few months, they still remain attractive. Savvy savers should seriously consider locking away some of their cash now to take advantage of these higher rates while they’re still available. It’s all about protecting your savings against the inevitable rate reductions that could be just around the corner.
Remember, fixed-term bonds offer certainty and security for your money over a set period – so if you’re comfortable with not needing access to those funds for a while, this could be a smart move. But it’s essential to make sure that you will not need access before the bond matures.
Many people are under the impression that if you need access to the money before the end of the term, that you can withdraw your money, albeit with a hefty penalty. However, although this is true with fixed rate ISAs, it’s not usually the same with bonds. In the vast majority of cases there is simply no access before maturity, except on death.
Don’t forget your tax free allowances
With savings rates still relatively high, especially when compared to a couple of years ago, we are paying a vast amount more tax on our savings. According to data from HMRC, the amount of tax paid on savings in the last tax year (2023/24) was £6.56 billion, up from just £1.24 billion in 2021/22. And they have projected that the amount will increase to nearly £10.4 billion in the current tax year!
Before the base rate started to increase in December 2021, the top 1-year bonds were paying around 1.30% and although you could earn a little more if you were prepared to fix for longer, the top 5-year bonds were still only paying around 2%.
Today the top rates available are still more than three times this – although it’s interesting to note that the best longer-term bonds are offering lower rates than the shorter term bonds. This is unusual but it illustrates current market conditions. As interest rates are expected to fall further, providers don’t want to be paying more than they need to for longer.
But this also means that you might be sensible in locking away some of your cash for longer, to have access to today’s rates for a few extra years.
Regardless of what you choose, savers are paying more and more tax on their savings as the tax-free Personal Savings Allowance (PSA) is being fully utilised with smaller deposits than in the past. With a 1-year fixed rate bond paying 1.30%, you would need a deposit of £76,924 to breach the £1,000 allowance for basic rate taxpayers.
With the top 1-year bond still paying 5% today, just £20,000 will produce £1,000 in interest.
Which is why cash ISAs have become so popular again.
According to Bank of England statistics, at the end of July this year, there was £370.9 billion held in adult cash ISAs, compared to £316.3 billion in July last year.
Whilst fixed term bonds look like they pay higher interest rates than the equivalent ISAs, that depends on your tax situation. If you have already fully utilised your PSA, then the tax-free return from an ISA is likely to be more than the after tax return on a bond.
For example, the top 1-year bond currently available is paying 5% - but if you deduct basic rate tax, the net rate is 4%. In the meantime, the top 1-year fixed rate ISAs are paying 4.61% tax free!
We know that for those with larger amounts of cash to find homes for, it can be a pain to monitor the market and the accounts you hold, never mind switching multiple savings accounts when necessary.
This is where cash platforms come into their own.
Think of a cash savings platform like a savings supermarket, where with a single application and log-in, you can pick and choose multiple competitive savings accounts - from easy access to fixed term bonds - and providers at the click of a button. Whilst not whole of market, cash platforms do make it easier to spread your cash, so that it can be better protected by the Financial Services Compensation Scheme (FSCS).
But that’s not all. Cash platforms often partner with banks that cannot be accessed directly, and as they are lesser known, they are prepared to pay higher rates to attract money and choose to use the platforms to raise the funds they want. Added to that, the platforms conduct the necessary due diligence to ensure these banks are legitimate and part of a compensation scheme, such as the UK Financial Services Compensation Scheme (FSCS) – so you don’t need to worry.
So, if you are cash rich but time poor, or you are a procrastinator when it comes to sorting your cash savings, let a platform take the strain. They may not be whole of market, but if you can improve on what you are currently earning, what have you got to lose?
@savingschampion
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