The latest CACI data, which compiles the savings deposits of 34 leading providers of adult cash savings, shows a third of instant-access savings accounts are earning 1% AER or less. That's despite a variety of deals currently paying more than 4%.
Here, Which? takes a closer look at the data and reveals exactly how much savers with money in low-interest accounts could be missing out on.
Paltry rates on millions of instant-access savings
There's rarely been a better time to switch savings account. The average instant-access rate has risen from 0.59% in July 2022 to 2.41% AER this month, while the average instant-access Isa rate has jumped from 0.65% to 2.54% within the same time period. And these averages mask some much better individual rates, as you can see in the table below.
Derek Sprawling, Paragon Bank's director of savings, said: 'Given rates have been increasing across fixed and instant access accounts for over a year now, it’s still surprising that over three in every £10 in an instant-access account earns 1% or less.
'What’s even more surprising is those individuals with significant balances of £10,000 or more in their account earning poor rates of return. I would urge savers to scour the market for better-paying accounts.'
Find out more:What are the best instant-access savings rates?
Moneyfacts data shows the top rate for an instant-access savings account is currently 4.52% AER with Shawbrook Bank, while the best instant-access Isa rate is 4.22%, also from Shawbrook Bank.
The table below shows the top restriction-free instant access savings and cash Isa accounts, ordered by rate:
The biggest advantage of instant-access accounts is the flexibility they offer savers to deposit money whenever they want and make withdrawals without giving notice. They also don't tend to require a large lump sum to open.
However, rates tend to be lower than fixed-term accounts that require you to lock your money away for a set period of time. Also, unlike cash Isas, savers are liable to pay tax on any interest earned above the personal savings allowance (PSA) threshold – currently set at £1,000 for basic-rate taxpayers and £500 for those that pay the higher rate on income tax. The PSA doesn't apply to additional rate taxpayers.
Whether you opt for a saver or an Isa, the top instant-access accounts offer at least 4% AER, so if you have cash stashed in a low-interest account you could potentially be missing out on hundreds of pounds.
For example, if you leave £5,000 in an account paying 1% AER and don't make any withdrawals, you would earn just £50 in interest after a year. But switching to Shawbrook Bank's product would generate £231 after 12 months.
Find out more:Why are some savings rates still so low?
The base rate is important because it dictates the interest banks have to pay to borrow from the Bank of England. When the base rate rises, banks tend to look to savers' deposits for a cheaper way to fund their borrowing. However, banks are under no obligation to pass on the rate rises or falls, unless a link to the base rate is specified in a product's terms.
Part of the reason why some providers are so slow to raise savings rates is customers' hesitance to switch. If enough loyal customers voted with their feet, they would be forced to compete more for business and pass on base rate rises.
Fix to get higher rates
Instant-access accounts are well suited to savers who want peace of mind that they can get at their cash quickly. But that extra flexibility comes at a price.
Not only is the interest lower than with fixed-term accounts, but the rate is variable and could go up or down depending on the market. So if, for example, the base rate does start to drop later this year as predicted, you may find your provider adjusts the savings rate downwards in response.
Locking your money away for longer in a fixed-term account means the rate you're offered when you open a fixed product will stay the same for the duration of the term. Shorter-term fixed bonds are currently enjoying the best rates, with FirstSave's 1 Year Fixed Rate Bond offering 6.1% AER.
You may find better returns in the long run with a two to five-year account, however. That's because if you want to reinvest your savings once the one-year bond matures in 12 months' time, savings rates could be significantly lower than now.
Find out more:source https://www.which.co.uk/news/article/250bn-of-savings-earning-less-than-1-interest-what-rate-could-you-be-getting-ansWt8u4xrkc