Interest rate cuts one year on – how to be savvier with your savings in the current market

19 March marks a year since the Bank of England cut the base rate for the second time in quick succession. The move to a record low of 0.1% was aimed at supporting the economy as the impact of Covid began to take hold.

As savings rates are linked in part to the base rate, banks and building societies followed suit with rates being cut across the market. Some cuts were quicker and more severe than others, with most of the big banks offering just 0.01% on instant access accounts by the summer.

Instant access products were the first to bottom out, but the fall in average fixed term rates took place throughout the year.

Average savings rates (including unconditional bonuses)

Source: Bank of England, 28 February 2021

Changing how we manage our finances

As we were thrown into the first lockdown and confined to our homes, we became a nation of savers. In the 3 months before the first lockdown, we saved an average of £4bn a month. In the 3 months after that, this shot up to £19bn a month. These figures stayed strong for the rest of the year and we’ve now tucked away over £162bn since the first lockdown.

Household savings

Source: Bank of England 10 March 2021

Meanwhile the government was using National Savings & Investments (NS&I) to hoover up huge amounts of cash. Income Bonds propped up the savings market for much of the summer with a market-leading instant access rate of 1.16% AER/ 1.15% Gross*. But in a market of ultra-low rates, they realised they were paying too much and subsequently cut their rates to the bare bones. It became increasingly difficult for savers to earn a good return.

Another factor here is the target that NS&I are set by the Treasury. This was raised in response to the pandemic to a maximum of £40bn. By the end of the summer it became clear that even this lofty target wasn’t enough, so a cut was inevitable to stem inflows of cash.

NS&I’s cuts released a flood of money into the savings market and other banks soon realised they didn’t need to compete as hard to bring money in, so began slicing their own rates.

The savings market now looks very different to this time last year. But that doesn’t mean it’s not worth saving. If anything, the last year has taught us the importance of keeping access to cash to cover the unexpected.

How much cash you should hold

How to make the most of your savings

Firstly, you should check the rate you’re getting. It might sound simple, but our survey showed 43%** of savers don’t know what rate they’re on. And given the plethora of cuts over the past year, you could be in for a surprise.

To get a good return it's likely you’ll have to work harder than last year. And if you’re used to saving with a high street bank, you might need to get comfortable moving your savings elsewhere.

There are much better rates available. The best easy access account in the market currently pays 50 times more than lots of large high street banks. But the market is fluid and rates are changing on an almost weekly basis.

A simple way to get good returns on your cash

Constantly chasing the best rates can be exhausting. Scouring the market, filling in application forms, and then having to prove who you are and set up new security information if it’s with a new bank. Then you have to do it all again if you decide to switch to find a better rate, or if yours is cut. You’d be forgiven for thinking is it worth the effort? Rates can and do change regularly.

Active Savings can help. It takes the hassle out of finding and opening new savings products offering competitive rates. It might be the only savings account you’ll ever need.

One online account lets you choose savings products from lots of banks and building societies. Pick from easy access and fixed terms ranging from just three months up to three years. That’s more choice than you’ll find with most high street banks who typically only offer one or two fixed terms.

Opening new products is easy and only takes a few clicks online. No paperwork, no hassle. And you’ll see everything together in one place, making it easy to manage.

All of our partner banks are covered by the Financial Services Compensation Scheme (FSCS), which covers eligible deposits up to £85,000 per banking licence.

This article isn’t personal advice. Please remember that inflation reduces the future spending power of cash. Fixed term products usually don’t allow access to your money until they end. High street banks offer instant access accounts which allow immediate access to your money, Active Savings offers easy access accounts and withdrawals usually take one working day.

*AER (Annual Equivalent Rate) - AER shows what the interest rate/expected profit rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.

Gross - The interest rate without any tax removed. Interest/profits are paid gross. You are responsible for paying any tax due on interest/profits that exceed your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

Expected profit rate (EPR): Islamic banks offer an expected profit rate rather than interest on their savings products in order to comply with Sharia banking principles.

**HL Survey September 2020, 1,461 responses.

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.