Interest rate cuts – how to shelter your savings

Interest rates on savings accounts often follow changes to the Bank of England (BoE) base rate. Earlier this year, they fell sharply as the BoE cut rates from 0.75% to 0.10%.

But now they’re falling again, and this time it’s for a very different reason.

Average saving rates since BoE cut

Source: Bank of England 30 November 2020

Throughout 2020, National Savings and Investments (NS&I) offered market-leading rates on savings products which allowed instant access to your money. But from 24 November, their rates were savagely cut. A wave of money came looking for a new home.

Most of the banks offering the best rate of interest are closing products early and trimming back rates. Put simply, they don’t need to compete as hard for the money they want to bring in.

It’s arguably never been harder for savers to earn a good return. With inflation, which is the general price rise of goods and services, sitting at 0.3% – there’s a real risk that your money is losing value over time. So what can you do about it?

Here are two top tips.

1. Look further than your high street bank

One in three savers think the most important place to look for new savings products is the same bank they hold current accounts with. But well-known banks usually pay the lowest rates.

Most of the large high street banks offer 0.01% on their easy access accounts. That’s just £1 interest on a £10,000 savings pot after a whole year. And that’s without inflation eating into your real returns.

The truth is, the big names don’t need to work as hard for your money. But smaller banks do, and they’ll offer an attractive rate to get it. You can currently get 30 times more from your savings through our Active Savings service.

Saving with your high street bank is often the first port of call as they’re familiar and you trust them. Through the Financial Services Compensation Scheme (FSCS), your eligible deposits will be protected up to £85,000 per person.

This limit applies to all money you have under each banking licence. So if you have cash with different banks under the same licence it could be sensible to move your savings elsewhere, maximising your protection under the FSCS.

2. Use fixed terms

Most savings are held in instant or easy access accounts. Given how uncertain things are at the moment, that’s no surprise. But you might not need all your money in the same pot and it could be holding back your returns.

You should keep at least 3-6 months’ worth of expenses in an easy access account for any emergencies (around 1-3 years’ worth if you’re retired). But anything over this could be put to work in a fixed-term savings account (also called fixed-term bonds).

Fixed-term accounts pay a guaranteed rate of interest which is usually higher than instant or easy access accounts. The trade-off is that you usually can’t access your money until the term ends.

Based on the same £10,000, you can get £69 more on a one-year fix through Active Savings when compared to high street instant access accounts.

You don’t need to lock your money away for years if you don’t want to. You can usually fix from just a few months or up to five-years. The longer you fix for, the better the rate.

Chart showing average market rates - get more the longer you fix

Source: Bank of England 30 November 2020

Locking in rates can be useful when rates are falling. But the opposite is also true – you could lose out if rates rise in the future. That said, interest rates are likely to stay low for some time.

You could also think about blending fixed terms of different lengths, or open new fixed terms every month. That way you’ll always have money coming back regularly, while boosting your overall rate.

Improving your cash strategy

Isn’t this a lot of hassle?

Opening savings products with new providers can be time-consuming, especially if you don’t feel the rate is worth it. Application forms, identity documents, and remembering new sets of security information – sounds exhausting doesn’t it?

Active Savings could be the answer. One online account gives you access to a range of easy access and fixed term savings products across lots of banks and building societies.

You’ll have a choice of competitive rates (often far higher than high street banks) with no forms to complete. Opening new products is easy and takes just a few clicks.

You’ll see everything together in one place when you log in, alongside any other HL accounts you hold with us – making things easier for you.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.