MILLIONS of savers are set to see lower returns on their savings after the Bank of England slashed interest rates yesterday.
On Thursday, the central bank’s Monetary Policy Committee (MPC) cut the base rate by 0.25 percentage points from 5% to 4.75% on Thursday.
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The base rate directly influences the interest rates banks offer on products such as mortgages, credit cards, and savings accounts.
While mortgage holders are celebrating the reduction in borrowing costs, savers are bearing the brunt of this decision.
As borrowing costs fall, banks tend to lower interest rates on certain savings accounts.
Whether you are affected depends on your bank and the type of savings account you hold.
Some accounts have fixed interest rates for a set period, while others, such as easy-access accounts, can see their rates change at any time.
Analysis by Shawbrook Bank indicates that 1.4million savers with fixed deals ending before January could face financial setbacks if they do not get ready to switch accounts promptly.
Adam Thrower, the Bank’s head of savings, warns that failing to act quickly “could be costly” for these savers.
However, Rachel Springhall, finance expert at MoneyFactsCompare.co.uk, said: “The cut to interest rates is not all doom and gloom as savers can easily switch their flexible pots elsewhere.
“Challenger banks are offering attractive returns and it would be unwise to overlook them when they have the same protections in place as a high street bank.
“Savers need to proactively keep on top of the best rates and review their pots regularly to see if they are getting a raw deal.”
For instance, Principality Building Society’s Six Month Regular Saver offers an impressive 8% interest on savings, with a minimum deposit requirement of just £1 per month.
However, if you save a maximum of £200 each month for just six months, you’ll earn at least £27.53 in interest.
However, it’s important to be aware that each type of savings account has its own conditions and limitations.
Therefore, it’s vital to thoroughly understand these details to determine which account best suits your financial needs.
SAVING ACCOUNT TYPES
THERE are four types of savings accounts fixed, notice, easy access, and regular savers.
Separately, there are ISAs or individual savings accounts which allow individuals to save up to £20,000 a year tax-free.
But we’ve rounded up the main types of conventional savings accounts below.
FIXED-RATE
A fixed-rate savings account or fixed-rate bond offers some of the highest interest rates but comes at the cost of being unable to withdraw your cash within the agreed term.
This means that your money is locked in, so even if interest rates increase you are unable to move your money and switch to a better account.
Some providers give the option to withdraw, but it comes with a hefty fee.
NOTICE
Notice accounts offer slightly lower rates in exchange for more flexibility when accessing your cash.
These accounts don’t lock your cash away for as long as a typical fixed bond account.
You’ll need to give advance notice to your bank – up to 180 days in some cases – before you can make a withdrawal or you’ll lose the interest.
EASY-ACCESS
An easy-access account does what it says on the tin and usually allows unlimited cash withdrawals.
These accounts tend to offer lower returns, but they are a good option if you want the freedom to move your money without being charged a penalty fee.
REGULAR SAVER
These accounts pay some of the best returns as long as you pay in a set amount each month.
You’ll usually need to hold a current account with providers to access the best rates.
However, if you have a lot of money to save, these accounts often come with monthly deposit limits.
We’ve outlined the best savings rates by account type below to help you maximise your returns.
What’s on offer?
The best fixed rate currently offered is Atom Bank’s one-year fixed bond, which pays 4.8% and only requires a minimum investment of £50).
Ahli United Bank’s one-year fixed bond also offers 4.8% back, but with a minimum investment of £1,000.
This means that if you were to save £1,000 in this account, you would earn £48 a year in interest.
The best notice accounts offer slightly higher rates than the best fixed-term bonds.
These also come with more flexibility when accessing your cash.
The Bank of London and The Middle East’s 90 day notice account offers savers 5.15% back with a minimum £10,000 deposit, for example.
Vanquis Bank’s 90 day notice account offers 5.10% back to those with less money to save – and it only requires a minimum deposit of £1,000.
This means that if you were to save £1,000 in this account, you would earn £51 a year in interest.
If you’re looking for a savings account without withdrawal limitations, then you’ll want to opt for an easy-access saver.
These do what they say on the tin and usually allow for unlimited cash withdrawals.
The best easy-access savings account available is from Cahoot (owned by Santander), which pays 5% – and you only need to pay a minimum of £1 to set it up.
This means that if you were to save £1,000 in this account, you would earn £50 a year in interest.
Furness Building Society’s easy access saver offers customers 4.9% back on investments worth £1 or more.
If you want to build a habit of saving a set amount of money each month, a regular savings account could pay you dividends.
Principality Building Society’s Six Month Regular Saver offers 8% interest on savings.
It allows customers to save between £1 and £200 a month.
Save in the maximum, and you’ll earn 27.53 in interest.
While regular savings accounts look attractive due to the high interest rates on offer, they are not right for all savers.
You can’t use a regular savings account to earn interest on a lump sum.
The amount you can save into the account each month will be limited, typically to somewhere between £200 and £500.
Therefore, if you have more to save, it would be wise to consider one of the other accounts mentioned above.
What’s next for savings rates?
Savings rates usually rise and fall with the Bank of England’s base rate.
The central bank’s decision to cut rates yesterday come after the Office for National Statistics (ONS) reported that inflation stood at 1.7% in September, well below the BoE’s 2% target.
Interest rates had previously risen from historic lows of 0.1% in December 2021, peaking at 5.25% in July 2023, as part of efforts to reduce inflation to the Bank’s target.
However, the latest MPC meeting come only one week after Rachel Reeves announced nearly £70billion in additional spending during her Autumn Statement.
The Office for Budget Responsibility (OBR) indicated that this sharp increase in spending will contribute to higher inflation in the coming months, although it will also help drive stronger economic growth.
It forecasts that inflation will average 2.5% this year and 2.6% next year before decreasing, assuming the Bank of England takes action to help bring it to the target rate.
As a result, money markets are now betting interest rates will stay slightly higher for longer.
But, the base rate is still expected to fall to 3.5% by the end of 2025.
Read more on the Scottish Sun
That’s bad news for savers, whose rates typically fall when the Bank’s rate is cut.
However, in the meantime, opting for a fixed bond can be a useful bet to help ride out future cuts to the base rate.
FINDING THE BEST SAVINGS RATES
WITH your current savings rates in mind, don’t waste time looking at individual banking sites to compare rates – it’ll take you an eternity.
Research price comparison websites such as MoneyFactsCompare.co.uk and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
As a benchmark, you’ll want to consider any account that currently pays more interest than the current level of inflation – 2%.
It’s always wise to have some money stashed inside an easy-access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you’re saving for a long-term goal, then consider locking some of your savings inside a fixed bond, as these usually come with the highest savings rates.
