It was not the easiest month for savers. Rates were already languishing before the coronavirus pandemic, but now they’re racing fast to the bottom.
Two cuts in the Bank of England base rate and an economic stop, along with people piling up money to the safe haven of savings accounts, have created the perfect storm for a drastic drop in interest rates.
The best buy rates for easy access have fallen below 1 percent, while repair doesn’t offer much more.
Some households may have been better off at the close and almost accidentally developed a saving habit
While some may think it’s not worth saving at the moment, a piggy bank to fall back on has never been more important – even if the rates you get for parking money aren’t great.
Stepping into the savings habit is essential for financial security, no matter how low the rates offered. We explain why and how to find the best deals.
Why have the rates fallen?
Savings rates have fallen from a cliff since March. Average rates for easy access have fallen from 0.59 percent in January to 0.26 percent in June, a record low.
And the average one-year fixed interest rates fell from 1.2 percent to 0.86 percent in the same period.
There are several reasons why interest rates have fallen. The Bank of England’s base rate will drop from 0.75 percent to 0.1 percent in mid-March, a record low.
Although savings rates have long been disconnected from the base rate, it still affects how many banks pay savers, as it determines how much the Bank of England pays them for the money they hold.
A lower base rate means that banks earn less from the Bank of England, making it more expensive to pay savers decent interest.
That is why large banks always respond to a basic rate cut by lowering their own rates.
In conjunction with this, an inexpensive financing arrangement has been set up by the Bank of England designed to provide banks with financing at that record low base rate.
Now that bank loans outside of emergency loan schemes have also fallen, banks have less need for savings.
In response to the coronavirus, the Bank of England lowered its base rate in mid-March to a record low of 0.1%
There’s no need for a bank to pay a 1.5 percent savings interest on their cash if they can get it 0.1 percent from the Bank of England.
And finally, many of the banks that offer the best rates are smaller banks, which cannot tolerate the money flow they have been offering for a long time.
They lower interest rates and in response to this other banks do the same, and you get a spiral that sometimes only stops when there is a larger bank that acts as a buffer.
Hopefully, with treasury-backed National Savings & Investments bank offering the best easy-access accounts and one of the best easy-access tax-free ISAs, it could do just that and easy-access rates won’t drop for the time being.
How long this takes remains to be seen.
Those who can afford to save have swollen their balances during the closed months. But it is important to keep the savings habit going, even as life returns to normalcy
Why it is still important to save
Interest is a reward – albeit an ever smaller one – for saving and not necessarily the main reason for doing so.
Many households will have experienced a saving habit thanks to the lockdown in recent months, avoiding an estimated £ 182 in spending per week on average.
And the Bank of England discovered a record £ 25.6 billion tucked away by households in May, meaning that a collective £ 56.6 billion was stored between March and May at the height of the coronavirus pandemic.
If you’re one of those happy households, it’s important to keep that going, if you can. Whether it’s a broken microwave or something as serious as losing your job, an experience many unfortunately brace themselves for, experts always praise the importance of having a cash safety net or an emergency savings stack, usually from a a number of months.
And given the current crisis, it may be a message that will take many more to heart.
Experts often recommend working out how much you can save and transfer the day you paid or setting up a direct debit.
Why it is still important to switch
If the rates are low, what’s the point of saving? As with any average, some banks will offer more and some much less.
The UK’s major banks now regularly pay only 0.01 percent interest, or just £ 1 on every £ 10,000 in savings.
Sector data pertaining to banks, including the biggest names of big names in the UK, found £ 176 billion, or more than a third of savers’ money, earning only 0.1 percent interest.
This not only allows the big banks to get away with paying savers because they have billions in cheap money, but it also costs savers money.
If you moved £ 10,000 from an easily accessible bill paying 0.01 percent to NS & I’s easily accessible bill paying 1 percent, you would earn £ 99 extra per year.
Millions of people cost themselves hundreds of pounds a year in loss of interest by leaving their money in old accounts with banks on the street that pay little interest
It’s worth noting that there is very little premium for locking your money away for longer than a year at the moment, so an easily accessible, time-limited notification, or regular savings account that lets you throw away a certain amount per month is probably the best choice .
It’s easy enough to switch accounts, just open a new one on the provider’s website or any of the other ways they offer, withdraw your old account and close it and transfer your savings to the new one.
What about Isas?
The rates for tax-free deals are hit even harder than standard savings accounts.
The best rate is 0.9 percent, without an account you pay 1 percent.
And a benefit that allows taxpayers with a base rate to earn £ 1,000 a year tax-free, and higher taxpayers, £ 500, have also left people wondering if they were worth it.
This is because the main selling point is that all interest is tax free, and with low rates, many are unlikely to earn enough interest to pay tax.
|Average easily accessible Isa rate|
But Isas, which has an annual fee of £ 20,000 each tax year, is likely to improve their rates at some point in the future, and the 21-year tax package will be lowered less quickly than the personal savings allowance.
Savers with multi-year Isa savings can also transfer past allowances by transferring them, as you can normally only pay one cash Isa per year.
You can choose to transfer old pots in full or just a percentage of it, which could be an idea for people with more than £ 85,000 saved, the maximum covered by the financial services compensation scheme.
Savers with Isa fees from previous years can often transfer them to better paying accounts without losing the tax-free status. But you have to follow the rules
Not all banks accept wire transfers, including NS&I, which offers the easiest accessible Isa payment of 0.9 percent, so it’s important to check.
It is also important to check for any transfer costs as this could damage your interest.
You should be sure to check your account terms and conditions to avoid fines, and don’t forget to withdraw your money yourself as it will lose tax-free status.
The ongoing coronavirus crisis also means banks may take longer to process transfers, so be on the lookout.
How to find the best deals
These are Money’s independent best buy savings tables that are updated daily with the latest interest rate cuts and changes.
In the meantime, these are the best rates available:
Easy access: NS&I Income Bonds – 1.15 percent
Note account: BLME 90 days notice – 1.1 percent
Regular savings account: Coventry Building Society – save up to £ 500 a month – 1.85 percent
A year: Al Rayan Bank – 1.11 percent
Two years: Al Rayan Bank – 1.41 percent
Easy access (without catch): Cynergy Bank – 0.9 percent
A year: Metro Bank – 0.9 percent
Two years: Metro Bank – 1 percent
When you have opened an account with new money or transferred old pots, it is important to set up alerts to check your rate every few months.
Banks and building associations will notify you of rate changes, but they can easily be overridden or not read properly.
Some of the links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us to fund This Is Money and keep it free. We do not write articles to promote products. We do not allow a commercial relationship to affect our editorial independence.