The longer cash is left ‘languishing in accounts, the lower the rate tends to drop’ – why? | Personal Finance | Finance
Savings rates remain at rock bottom levels at the moment but despite this, new research shows savers are reluctant to find better deals. Hargreaves Lansdown surveyed 2,000 adults from across the UK about their savings attitudes and habits in September 2021. The results showed 50 percent of savers have not switched savings accounts in the past five years, with 37 percent having never switched at all. Sarah Coles, a personal finance analyst at Hargreaves Lansdown, issued a warning about how dangerous this could be.
“Our loyalty to our bank, and to savings accounts paying miserable rates of interest, is costing us billions of pounds,” she said.
“Even if we just switched the money collecting dust in accounts paying no interest at all we could make £1.6billion in interest, and if we switched those paying rock bottom rates in high street accounts, we could save billions more.”
Ms Coles went on to break down some of the key elements that are holding savers back from acting.
Too low to bother
“It’s easy to see why people don’t think it’s worth the effort of switching while rates are so low,” she continued.
“But rates have picked up in recent months, so if you’re earning next to nothing in a miserable high street savings account paying 0.01 percent, you could make 65 times the interest by switching to the most competitive easy access rate on the market, or 150 times the interest by tying your money up for a year.”
The most competitive easy access rate Ms Coles referred to is from Atom Bank, which currently pays 1.5 percent on a fixed year term.
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Ms Coles continued: “And this is only the half of it, because the longer you leave money languishing in an account, the lower the rate tends to drop. It’s one reason why we have £246.5billion sitting in accounts paying no interest at all.
“Over the past few years, we have overwhelmingly put money into easy access accounts instead of fixed rate accounts. But while this is absolutely the right place for your emergency savings of three to six months’ worth of expenses, and any money you know you will need in the immediate future, it’s a missed opportunity for the rest of your savings. The gap between the interest available on easy access accounts and fixed rate accounts is starting to open up again, and the most competitive account fixed for a year is now paying more than twice the best easy access account.”
I trust my bank
Many savers tend to stick with the big high street banks or whoever they set up their accounts with as a child. However, by failing to examine what’s available with some of the newer companies, savers could be missing out.
Ms Coles continued: “The second most common reason for money languishing in terrible accounts is that we trust our bank. We know the high street stalwarts well, so it’s easier to feel more comfortable leaving our money with them, rather than using a less-well-known online bank.
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“However, these newer banks have to follow the same rules as those on the high street in order to be allowed to operate in the UK. They also come with all the same protections, so if anything was to go wrong, the first £85,000 in any institution is guaranteed by the Financial Services Compensation Scheme.
“Given that these smaller and newer banks tend to offer the best rates, we need to consider how much interest we’re losing by choosing not to trust a bank on the grounds it doesn’t feel as familiar.”
It’s too much hassle
Ms Coles concluded: “We are all busy, so it can feel like a bit of a rigmarole to have to keep moving money around for a better rate. One way to cut the hassle of a switch is with an online cash savings platform, like Active Savings. Instead of having to open a number of different savings accounts with a variety of banks – you can open one account with one application and move your money between different accounts with different banks in a handful of clicks. You can also see all your accounts in one place, which makes it much easier to keep your eye on them.”
The need for bank switching was made especially prudent today as the latest inflation figures were released.
The Office for National Statistics (ONS) detailed the CPI rose to 3.2 percent last month, a record breaking increase. In July, inflation stood at a much more manageable two percent.
While the ONS expects this increase to be temporary, many warn even higher rises could be on the horizon, limiting people’s spending power.
Matthew Roche, Associate Investment Director at Killik & Co, commented: “Despite a temporary dip last month, August’s 3.2 percent jump in the Consumer Prices Index is the biggest increase since records began in 1997 and a larger rise than had been expected.
“While the Office for National Statistics expects the August increase to be temporary, some economists are predicting inflation reaching four percent by the end of the year. This is on account of a record number of job vacancies and wages rising at fast rates, especially as ongoing skills shortages and subsequent supply chain issues are forcing employers to increase pay to compensate workers who are feeling the strain of a shrinking workforce.
“Even if inflation does stabilise or drop back, there is likely to still be a significant gulf between the interest rates available on savings accounts and inflation. This will continue to leave traditional cash savers worse off as the purchasing power of their savings will erode over time.”
It remains to be seen if the Bank of England will be forced to target interest rates in light of these inflation figures. Currently, the central bank has the base rate at 0.1 percent, which in turn limits what retail banks can offer.
However, Bank of England (BoE) policymakers recently gave the clearest indication of a potential increase seen in some time. In August, there was an even split among the Monetary Policy Committee as to whether rates should be increased. Four of the BoE’s policymakers believed the minimum conditions needed for considering an interest rate hike had been met, while four thought the recovery was not strong enough.
Last week, the Treasury Committee questioned the BoE on interest rates and Felicity Buchan, the Conservative MP for Kensington, brought up the recent split.
Ms Buchan said: “In our discussion on forward guidance and whether the threshold [for raising rates] had been met, you kindly gave us the information it was four to four…
“…Do you mind telling us where you stand [today]?”
In response, Andrew Bailey, the Governor of the Bank of England, said: “I think we can do that. So my view was that the guidance had been met.”
Dave Ramsden, the Deputy Governor for Markets and Banking at the BoE, also responded: “I gave a speech in July where I sort of flagged that I thought the guidance was close to being met.
“And by the time we got to the August round, my view also was that the guidance, which [as you know] was significant progress on eliminating spare capacity and sustainable return of inflation to target, had been met. But those were always necessary rather than sufficient conditions for tightening.”
The next decision on the base rate will take place on September 23, 2021.