The Bank of England has left borrowing costs on hold for the first time in nearly two years following better-than-expected figures that show inflationary heat is steadily disappearing from the UK economy.
From an all-time low of 0.1% in December 2021, the Bank’s influential Bank Rate continues to stand at a 15-year high of 5.25%.
This is good news for savers who spent more than a decade earning next to nothing on their cash. But there are still factors to consider when it comes to taking full advantage of prevailing interest rates.
Adam Thrower, head of savings at Shawbrook Bank said the Bank Rate’s current level is a boost for savers resulting in better returns which means savers’ money grows faster. “Furthermore, with inflation receding, the value of savers’ money will stretch further, protecting its purchasing power over time.”
But Mr Thower warned that savers should focus not just on the rate they’re receiving, but also the type of savings account they are choosing for their money. “If interest rates climb, the likelihood of some savers exceeding their Personal Savings Allowance (PSA) threshold rises, potentially leading to tax implications.”
Under the PSA, basic rate (20%) taxpayers can earn £1,000 of savings interest a year without paying tax, while higher-rate (40%) taxpayers can earn £500 of interest tax-free. Additional-rate taxpayers (45%) (those who earn more than £150,000 a year) don’t receive the PSA, which means they pay tax on all their savings.
Mr Thrower said that, by opting for an ISA in which savers can stash up to £20,000 a year and earn the interest tax-free, savers can benefit from tax-efficient growth maximising potential returns.
Rachel Springall, finance expert at Moneyfacts, warned that the onus is on savers to get the best returns on their cash. She said: “It is imperative that savers take time to review their existing accounts and not presume any Bank Rate rise will be passed onto them, as this is never guaranteed.
“Those savers who have their cash sitting in an easy access account for convenience may find their loyalty is not being repaid. Frustrated savers will need to seek alternative brands which are paying attractive returns, such as from the many building societies and challenger banks.”
Looking forward
Alice Haine, personal financial analyst at Bestinvest, said: “For savers, improving inflation data means bumper savings rates may soon deliver a positive return on their nest eggs – but they need to act fast.
“While savings rates have been jumping up in recent months as lenders compete for new customers, a rate pause could change the course of direction. So now might be the time to nab a fixed-rate deal before the best offers disappear.
Myron Jobson, senior personal finance analyst at interactive investor, said: “Savers might not experience another uptick in the interest applied to cash stashed in savings – although some banks and building societies might not be done with passing on previous rate rises, having been slow off the mark to do so.
“Those who can afford to put money away for at least five years or more should consider investing for the potential of long-term inflation-beating returns that far outstrip savings rates.
“While past performance is not indicative of future results, savers can take courage in the fact that history shows that even a ‘middle of the pack’ fund is likely to outperform returns from cash savings interest over the long term.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “This is likely to be the top of the savings market, at least for now. Now that rate rises have paused, banks won’t be pricing in higher rates during the fixed period, so rates will settle and are likely to fall.
Ms Coles advised would savers that “if you’ve been waiting to fix near the top, it’s worth getting your skates on”.
She added: “The very best deals may not be around for much longer. If you haven’t switched your easy access rate for some time, it’s also worth making a move while there are some really attractive rates on the market.”
The next Bank Rate announcement is on 2 November 2023, three weeks before the Autumn Statement.
