Savers have been waiting for more than a decade for banks to start paying decent returns in cash, and now it’s finally happening. The downside is that as inflation skyrockets, the value of savers’ deposits continues to fall in real terms.
The only thing savers can do to protect themselves is to seek the best possible rate, but they also face a difficult choice.
Are they stuck on a better buy rate today, or are they waiting in the hope that they can get an even better deal in a month or two?
The Bank of England has raised interest rates five times since December, from 0.10% to 1.75% today.
It is expected to raise base rates again at its next meeting on September 15, possibly to 2.25%.
When that happens, savings rates will inevitably go up. The problem with waiting is that it means you’ll miss today’s best rates and get less in the short term.
However, a savings expert has a solution.
Andrew Hagger, banking expert at MoneyComms, urges savers to spread their money across different accounts to take advantage of the growing number of best buy deals as deposit rates continue to climb.
Shawbrook Bank’s best easy access account today pays 1.86%, followed closely by Paragon Bank at 1.80% and the Nationwide Building Society which pays 1.75%, according to figures from Moneyfacts.
Anyone with an account getting 0.10% or less with one of the big four high street banks Barclays, HSBC, Lloyds or NatWest should move on to get a better rate today.
The appeal of easy-access accounts is that you can access your money anytime and move it elsewhere when you find a better deal, Hagger says.
Still, you can get even better returns from a notice account, while maintaining some flexibility to move your money around as rates rise.
Hagger points to Investec Bank, which pays an interest rate of 2.10%, the best on the market, with 90 days’ notice.
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Yet some of the most impressive rates today are paid by one-year fixed rate bonds. “Investec Bank and Tandem Bank have both just launched one-year fixes paying 3.30%, while Shawbrook pays 3.26%.”
Investec Bank’s fixed rate saver requires a minimum sum of £5,000, but the minimum deposit in Tandem’s one-year fixed saver is just £1,000.
Hagger says that just 12 months ago, the best one-year bond was paying less than half that amount, with Tandem Bank giving savers 1.41%.
This time last year, the average one-year savings bond was yielding just 0.60%, according to Moneyfacts. Today, the average is 1.97%.
Average rates have more than tripled, says Hagger, leaving him completely “blown away.”
Also, fixed rate bonds pay even more if you can lock in your money for a longer period of time, but now the difference is minimal.
Monument pays 3.46% fixed for two years, with JN Bank paying 3.35%.
Five-year fixed-rate bonds usually pay the highest rates, but now only offer a little more, as Aldermore’s best savings account pays 3.50%.
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This suggests that banks expect interest rates to peak next year and then fall as inflation comes under control.
Yet savings rates are rising day by day and this will continue as the Bank of England raises interest rates again and again to curb inflation.
Savers face a tough choice between getting a maximum rate today or getting an even better one a month or so from now.
Waiting for the perfect moment to lock in a savings rate could backfire, giving you a bad return right now, but Hagger has a solution.
He suggests adopting a mix and match strategy, spreading the money between different accounts on different terms.
“If you put one-third of your cash savings in instant access at 1.86%, one-third in a 90-day notice account at 2.10%, and one-third in a one-year bond paying 3.26 %, your overall rate is 2.40%.
Even better, you have the freedom to move your money around as rates rise. “You can withdraw your money from an easy access account without penalty at any time and withdraw money from the account on notice within 90 days, if you wish.”
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “For long-term savings, you might get a better return from the stock market.”