We’re constantly being told to save, but many potential savers are discouraged by the poor interest rates on offer. We give an overview of saving accounts with information about:
- What criticisms there are of financial institutions’ treatment of savers
- Whether there should be a basic savings account interest rate
- Tips on getting maximum returns from your savings
- Whether there are alternatives to High Street savings accounts
British savers are loyal about where they keep their savings. Research has shown that 1 in 3 savers have had their easy access savings account for 10 years or longer while nearly half (45%) have been with the same financial institution for 5 years or more. However, this loyalty doesn’t always pay off. We explain the most common criticisms of High Street banks and building societies, and whether there are any changes in the pipeline to ensure they treat regular savers more fairly. We explain the different types of savings account on offer, weigh up their pros and cons and give advice about how to make the most of your savings. Are there alternative ways to get the maximum returns on money you have put by?
What criticisms are there of financial institutions’ treatment of savers?
It becomes immediately apparent that borrowers and savers are treated completely differently by UK financial institutions. Let’s take the example of rises in the Bank of England’s base rate. When this was raised by 0.25% in November 2017 and once again in August 2018, this increase was immediately reflected in the interest rate that was charged for borrowers. However, the same isn’t true of savers. Nearly a month after the rise, 75% of UK building societies hadn’t mentioned any plans to pass this rise onto those with savings accounts. Others had passed on a rise of 0.05% rather than 0.25% as they should have.
The reason for this situation is two-fold. Firstly, since 2012 all financial institutions have been able to borrow cheaply from the Funding for Lending and Term Funding Schemes. This estimated £150 billion of inexpensive loans has meant that they haven’t seen the need to compete for savers’ custom. The other reason is that they have all directed their attention to the returns offered by attracting borrowers and notably mortgage holders. The question is whether anything can be done to change this unfair treatment.
Should there be a basic savings interest rate?
The FCA are preparing to step in and rectify this unsatisfactory situation. They have requested that all UK banks and building societies pay a minimum basic savings rate saying that this could benefit UK savers by up to £300 million.
Before opening or switching your savings account, you should be familiar with the various savings accounts on offer and how they differ.
Although banks will initially be permitted to set their own rate, the regulatory body has said that legislation may be implemented if the rates they set are too low.
Questions on savings accounts
Savings accounts may be considered as low yield financial products. This is due to low interest rates that they offer to the account holder. However, the benefits of a savings account do not lie in this particular financial aspect. Instead, a savings account offers liquidity and easy access to your funds when you need them, such as for day-to-day living expenses.
There is no particular drawback to having multiple savings accounts as opposed to only one. If the approach of managing multiple savings accounts helps you to better manage your money, then it may be viewed as a positive, rather than a negative, endeavour.
The low yield due to low interest paid by savings accounts effectively means that you are losing money in the long run, compared to using different types of accounts, or otherwise investing your money. The low yield rate is especially evident as regularly, the rate of inflation outgrows that of the rate granted to you by banks when you hold a savings account with them.
Tips on getting maximum returns on your savings
Know the financial product
Before opening or switching your savings account, you should be familiar with the various savings accounts on offer and how they differ. In general, accounts with a variable interest rate allow easier access to your cash, but they pay much lower interest. By contrast, fixed rate deals vary in how much access you’re allowed to your cash, and withdrawals can often incur a financial penalty. The general rule tends to be the longer the notice you give of a withdrawal, the less it will cost you. Regular savings accounts also pay much higher interest, but you must make a firm commitment to put by a set sum every month (usually from £10-£500). You will be penalised if you miss or delay making a deposit.
You should also be aware of the differences between the flat rate and the AER (Annual Equivalent Rate) which is often quoted in advertisements for savings accounts. The latter is the savers’ equivalent of the APR for borrowers and informs you of the total interest paid including compound interest over the year. It doesn’t make much of a difference which one you compare, but you must make sure you are comparing like with like.
Check for introductory promotional rates
Many banks and building societies offer promotional rates to attract new savers, but you must know when your introductory offer expires. Many financial institutions will switch savers to an extremely low rate at the end of this period (usually 12 months.) It is therefore imperative that you regularly carry out a savings review and check what interest is being paid. If the promotion has finished, you should be looking around to switch your account elsewhere.
Are there alternatives to high street savings accounts?
Although many people to choose to keep their money in a well-known High Street financial institution, this isn’t always the best choice. 85% of standard savings accounts on the market currently pay under 2% in interest which is lower than the rate of inflation. Unfortunately, there are no longer any inflation-linked savings accounts, so what are your alternatives?
Credit Unions often offer much better rates than the big High Street names, but require an in-branch visit. The main advantage of saving with a Credit Union is that you’ll become eligible for much cheaper loans too.
Strange as it may seem, many current accounts offer better interest rates than savings accounts. You would have to pass a credit check before opening the account. Also, some savers may dislike the temptation of having their savings so readily accessible.
Online savings accounts
Less well-known financial institutions are often only available online, but their lack of a High Street presence allows them to offer competitive interest rates. Before signing up with an online firm, you should make sure that they are licensed and regulated. In this way, your money will be protected under the Financial Services Compensation Scheme up to £85,000. If you have savings in excess of this amount, you should divide it between two or more different accounts.
Switching to ISAs
Instead of opening an ordinary savings account, you could save your money in a Cash ISA. This gives you up to £20,000 interest-free savings in addition to HMRC’s Personal Allowance of £1,000 for the basic income taxpayer.
The Life-time ISA is another possibility for savers aged 18-39 since they receive a 25% bonus from the government. Finally, a Stocks and Shares ISA pays the highest returns of all, but savers must recognise how much riskier it can be as a savings option.
Conclusion – Don’t ignore your savings
Although many Britons regularly review their mortgage or energy provider, for example, they don’t do the same with their savings account. This can end up costing them money. A review of your savings should be something that you do at least once a year. In this way, you’ll be able to make the most of the money you have put by.