Why neglecting your savings could leave you hundreds of pounds worse off
More than a quarter of savers have never moved their savings, despite the fact they could be missing out hundreds of pounds of interest a year.
New figures from Hargreaves Lansdown show that fewer than half of people (44%) have switched their savings account in the past year, while over a third (36%) haven’t switched in five years. With inflation eroding the value of cash, leaving money in a low-paying account can seriously reduce you returns.
With interest rates starting to fall, seeking out competitive savings rates is more important than ever. The Bank of England’s Monetary Policy Committee is widely expected to cut the base rate when it meets next week. When the base rate falls, savings providers are usually quick to trim their rates in response, so savers might want to lock into higher rates while they are still available.
Fixed savings rates are already started slipping, with average rates falling by at least 0.03 percentage points between early November and early December, according to Moneyfactscompare.co.uk.
For example, the average one-year fixed rate dropped from 3.95% to 3.92% while the average five-year fixed rate saw a bigger drop from 3.93% to 3.88%.
Caitlyn Eastell, spokesperson at Moneyfactscompare.co.uk, said:“This year the top fixed bonds have been consistently paying above 4%, however, with the likelihood of a December base rate cut growing, this may not be the case for much longer. Savers should try their best to be reactive as there is a cost to waiting."
How much inaction could cost you
The cost of failing to review your savings shouldn’t be underestimated. Hargreaves Lansdown says that if you left a £20,000 savings balance languishing in the average branch-based high street savings account paying 1.5%, you’d lose out on £688 a year in interest compared to if you’d kept your money in a market-leading easy access account paying 4.5%.
Sarah Coles, head of personal finance, Hargreaves Lansdown said: “Savings inertia is particularly dangerous at times like this, when rates are dropping, and high street branch accounts have fallen so far behind inflation. Unfortunately, inertia can be even more powerful in this environment, because people assume rate cuts are the same across the board, so they don’t bother switching.”
Tax implications
If you have a substantial amount of savings, it’s important to factor in tax when deciding on the best homes for your money. Under current Personal Savings Allowance rules, only the first £1,000 of interest you earn is tax-free if you’re a basic rate taxpayer. This falls to £500 if you’re a higher rate taxpayer and additional rate taxpayers don’t get a Personal Savings Allowance at all.
Ms Eastell said: “Savers who are worried about being taxed on their savings could consider a cash ISA instead, as these accounts allow you to earn tax-free interest.”
You can save up to £20,000 into cash ISAs this tax year and next, but from April 2027, the maximum you’ll be able to save into cash ISAs will reduce to £12,000. This new rule does not apply to anyone aged 65 or over, who’ll still be able to pay in up to £20,000 a year.
Emma Steland, chief financial planning officer at leading wealth management firm Evelyn Partners says: “For now, savers and investors can still put up to £20,000 into ISAs in both the current and next tax year, leaving couples a potential £80,000 of overall ISA allowances, across cash and investments.”
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