For this week’s guide, Anna Bowes, savings expert from The Private Office, reviews the best offers on the savings market…
July’s inflation figure came in higher than expected at 3.8% last week, leading economists to predict that the Bank of England will push back an interest rate cut to later this year.
This could be positive news for savers, as they’ll likely get higher interest rates on their savings for longer. In fact, some fixed term bond and ISA rates have jumped up since the data was released.
But the same can’t be said for all accounts – and if you can’t find one with an inflation-busting rate, it might be decreasing your purchasing power.
Here Bowes takes a closer look…
Easy access
The changes in the easy access market have been limited – and any moves that have been made have been for the worse.
Cahoot closed issue 10 of its Simple Saver, which was paying 4.55%, and reissued a new version paying just 4.4% AER – and this is the top paying unrestricted account.
We also saw the West Brom Building Society’s Four Access Saver (Issue 3), paying 4.55%, withdrawn from the market.
“Unfortunately, with inflation ticking up, this means that for taxpayers who are already using their Personal Savings and ISA allowances, none of these accounts can earn more than inflation – but by choosing the best rates, savers can at least mitigate the damaging effect of inflation on their savings,” Bowes says.
“To keep up with inflation at 3.8%, a basic-rate taxpayer needs a gross return of 4.75% on a taxable account, while a higher-rate taxpayer would need 6.33% – an impossible task in the current market.”
“Even so, shopping around makes a substantial difference.”
How wrong account could cost you £1,300 – an example
Barclays is paying 1.11% on its Everyday Saver account. A basic-rate taxpayer with £50,000 in this account would take home a net return of less than 1%, at 0.89%. Compare that with a competitive account paying around 4.5% (before the deduction of tax): after tax, the basic-rate saver would take home 3.6% and the higher-rate saver 2.7%. Although neither beat inflation, both are far better than the paltry return from Barclays.
And the effect on purchasing power is clear.
With inflation at 3.8%, £50,000 left in the Barclays account for a year would grow to £50,445 after basic rate interest has been accounted for, but its real value would shrink to £48,589 once inflation is taken into account.
The same sum in a 4.5% account (3.60% after tax) would grow to £51,800 after tax. More importantly, its “real value” would be £49,904.
“Choosing the wrong account could therefore reduce purchasing power by more than £1,300 in a single year,” she adds.
Here are the top rates on offer across the savings market…
Easy access cash ISAs
Rate cuts as a whole have stalled among easy access cash ISAs.
The top paying account from the money app, Plum, is offering the best rate on the market at 4.41%.
Fixed rate bonds
“The inflation news seems to have had a calming impact on fixed rates,” Bowes says.
In the last week, while the top rates on the two to five-year bonds have remained the same, the top one-year fixed rate bond has improved.
Prosper is offering 4.43% via Aldermore. Aldermore is paying 4.14% AER and Prosper will add a 0.29% bonus at the end of the term, making this a market leading bond.
Birmingham Bank and newcomer Afin Bank both launched two-year bonds paying 4.41% pushing up the average of the top five.
Birmingham Bank has also increased rates on its three-year and five-year bonds to 4.44% and 4.5%.
“It’s interesting to see the rate curve starting to turn back to the norm – so paying a higher rate to those who are prepared to lock some of their cash up for longer,” Bowes adds.
Fixed rate cash ISAs
The top fixed term cash ISA rates have continued to hold steady.
That said, there have been a few new ISAs released paying better rates,
The two-year table has seen most of the action, with the top rate available increasing from 4.21% to 4.22%.
But the average of the top five has increased from 4.17% to 4.21% – a sign that competition is rife.
“The other terms have not seen any significant changes to mention, but what has occurred has, in the mai,n been positive – meaning there are plenty of inflation-busting cash ISAs available to choose from,” Bowes says.