Savers are being urged to lock in longer-term savings deals now after the top rates have started to be pulled from the market.
Last week, the Treasury-owned bank NS&I was the first major bank to pull its best-buy savings account paying 6.2 per cent – the highest amount a saver could receive since 2008.
The rate, for a one-year fixed-rate bond, had been available for just over a month, and had seen more than a quarter of a million people pour their money into the account, which had come close to matching inflation for the first time in years.
Other banks followed suit – Oxbury Bank, which pulled its one-year fixed deal offering 6.11 per cent, while Nottingham’s Beehive one-year deal giving returns of 6.1 per cent is also no longer available.
Meanwhile, the International Monetary Foundation released a report this week saying that it expected the UK to see higher interest rates for five years, analysis that hadn’t yet had the chance to take into account the impact of a war in the Middle East will have.
So what should your savings strategy be in uncertain geopolitical and economic times?
Fix for as long as you can
Experts say that despite longer-term fixed rates currently paying less than shorter term fixed deals, it is still likely to be worthwhile locking in for a longer time.
The best five-year deal is with JN Bank – Jamaica National Bank – offering 5.8 per cent followed by Cynergy Bank offering 5.75 per cent. Both are lower than the best one-year deal, which is with Al Rayan Bank paying 6.12 per cent. The Union Bank of India follows closely behind at 6.11 per cent.
But fixing for longer could still make sense, Anna Bowes of Savings Champion said.
“The fact that longer-term bonds are paying less than short-term ones makes it clear that the market expects the base rate to fall in the future. Although you can get a better return in the short term by locking in for a year or so, you are likely to get a better deal overall by locking in for the longer term.
“This is because rates are expected to fall. So, for example, currently the best five-year deal is 5.8 per cent with JN Bank. If inflation comes close to its target of 2 per cent, you will be earning more than inflation.
“By the time your short-term bond comes to an end, even if it has higher returns, when it comes to finding a new deal, it will likely be much lower.”
Ultimately, she said, it is probably worth having both a long and shorter-term account.
James Blower, founder of Savings Guru, said: NS&I withdrawing their bonds means we will see one year rates fall back towards 6 per cent and ultimately we expect them to go below this level by the end of the year.
“I’d suggest savers take fixed rates now, as we see no reasons at all why fixed savings rates will do anything but fall over the next few months.”
What if you need access to your money
If you are unable to lock your money away for years on end, then there are still other options.
The best easy-access account is offered by Coventry Building Society, at 5.2 per cent, which is still decent.
Other banks are also offering switching bonuses which could increase your funds. First Direct is offering new customers £175 cash plus 7 per cent on its regular saver account. To receive the bonus you need to pay a minimum of £1,000 into your new account within three months of opening.
TSB is also offering an £150 cash bonus plus £10 per month cashback for six months when people join its Spend & Save account.
Nationwide’s Flex Regular Saver offers 8 per cent and a bonus switching offer of £200. Your money will be locked away for a year, although you’re allowed three withdrawals over that time.
Switching could make you more than a high-rate fixed account. Those putting away £1,000 will earn £61.20 on the best one-year bond with Al Rayan Bank and £58 per year on the best five-year bond with JN Bank, with no switching bonuses.
But with the First Direct account you would make a total of £245, including the bonus; TSB would be £178.90.
Premium Bonds could also be an option. They are an investment product issued by NS&I where you are entered into a monthly prize draw where you can win between £25 and £1m tax free. The estimated prize rate is 4.65 per cent – it’s not guaranteed, but that is what is a typical return, you have the chance of making up to £1m if your bond gets picked by Ernie. And you can deposit as much money as you like and it will be guaranteed if NS&I goes bust.
What about a cash Isa?
An Isa lets you earn tax-free interest on your savings. You can split your allowance across several types of ISAs in each tax year including cash Isas. The current annual Isa allowance for the 2023/24 tax year is £20,000.
Savers will generally earn less interest with a cash Isa compared to a normal savings account in return for being tax free.
With Isas, you put money in and it earns some interest, on which you pay no tax. But since 2016, we have had a personal allowance on savings, which means you can make £1,000 interest in a non-Isa savings account without paying tax.
In the past few years, when interest rates were low, very few people ever got above £1,000 interest on their savings. And guess what? The banks paid you less interest on your Isa than they paid you on a non-Isa.
Interest rates have gone up, but even so, unless you’ve got a large amount of money – tens of thousands of pounds – you will still be better off in the non-Isa. The exceptions are people who pay higher rate tax, or those who have a lot of savings and have used up their allowance, which is £500 for a higher-rate tax payer.
Most people’s incomes are too low, so Isas are a waste of time. And the financial industry won’t tell you about this.
Currently, the average one-year fixed cash Isa rate is 5.27 per cent, although the best deal is with Virgin Money at 5.85 per cent. The average easy-access Isa rate is 3.28 per cent but Stafford Railway Building Society is offering a return of 5.25 per cent.
Why are rates dipping?
The NS&I rate represented how much rates had improved after bank bosses were quizzed by MPs and the Financial Conduct Authority (FCA), following increases to mortgage rates while savings rates remained near static.
Lenders admitted they “needed to do more”, according to the FCA, and they increased rates accordingly, bringing them to the highest level in a decade.
It sparked competition in the market, leading more people to switch accounts, increasing from 105,300 made in May to 114,139 made in June, according to the Current Account Switch Service.
However, after the Bank of England opted to pause increasing interest rates last month, there has been an expectation that banks offering the most generous savings accounts would start cutting their rates.
It is expected that more banks and building societies will soon follow suit and either withdraw or reduce their offerings in the coming weeks.
Bowes said: “There has been a noticeable number of the best buy one-year bonds that have been withdrawn since the NS&I Guaranteed Growth Bond was withdrawn.
“The introduction of the NS&I deal seemed to generate competition which kept the top rates on offer artificially high. Just before the bond was withdrawn on Thursday, the average of the top five was 6.12 per cent and today it’s 6.06 per cent. I expect things could start to drift further down going forward.”
She added: “With market expectations that the base rate is near the peak, the competition that we have seen could soon start to wane. Those who opt to lock some of their cash away for the longer term might find themselves earning more in the long run – and if inflation does fall to closer to the 2 per cent target, importantly your cash savings could be earning more than inflation.”
The best rates on offer
There are still a number of good offers on the market, especially for those who are able to lock their money away from a year or longer. Below are the best savings rates currently available.
Best one-year fixed rate
Al Rayan Bank – 6.12%
Union Bank of India (UK) Ltd – 6.11%
Ahli United Bank (UK) plc – 6.10%
Ford Money – 6.05%
Habib Bank Zurich plc – 6.03%
Best two-year fixed rate
Ford Money – 6.05%
Union Bank of India (UK) Ltd – 6.05%
Cynergy Bank – 6.00%
United Trust Bank – 6.00%
Close Brothers Savings – 5.95%
Best easy-access rate
Coventry Building Society – 5.20%
Ulster Bank – 5.20%
cahoot – 5.12%
Virgin Money – 5.12%
Shawbrook Bank – 5.11%
