Savers may be in a quandary about what to do right now. On the one hand, the fact that inflation has eased is good news, as it means it’s possible to achieve a real return on money squirreled away.
But at the same time, savings rates have already started to decline. This is as a result of the base rate cut in August – the first in more than four years (down from 5.25% to 5%). Inflation fell to 1.7% in September, down from 2.2% the previous month, a much bigger drop than many were anticipating (lower inflation means there is more chance that interest rates will fall). Inflation is now below the Bank of England’s target of 2%, hence the further base rate cut to 4.75% in November. More interest rate reductions are on the way, according to the Bank, though it said they would not be cut “too quickly or by too much”.
This will mean more bad news for savers as providers may be quick to pass on rate reductions. Given all this, you may be wondering what’s the best course of action – here we help you work out what to do.
Don’t stick with low-paying easy-access accounts
Right now, easy access savings rates are making a slow shuffle south and are likely to continue travelling in this direction. While there had been some resilient banks clinging on to rates of 5%, most have now dropped below this level. If easy-access rates do fall, there’s a risk you could find yourself with cash languishing in an account delivering lousy returns.
In order to make your money work as hard as it possibly can, now could be the time to turn your attention to fixed-rate savings accounts. Anna Bowes from Savings Champion, said: “There is now a renewed sense of urgency to lock up some of your cash, as rates will fall again.”
Take a look at longer-term fixed-rate bonds
Shorter-term bonds have suffered a succession of cuts during September and October, with the best rates paid on one-year and two-year fixes falling. But while the rates on shorter-term deals have dropped, top returns on longer bonds are holding up a little better. You should still be able to find deals of two years or longer at around 4.5% (at the time of writing). Caitlyn Eastell from Moneyfactscompare.co.uk said: “At present, it is as important as ever that savers review their pots and consider securing fixed returns for longer.”
Get your skates on
The key with a fixed-rate bond of any term is not to hang around, but to grab a good deal while you can.
Alice Haine from Hargreaves Lansdown, said: “Lock in a top rate now before the best deals disappear.”
Just take care when tying your money up in a fix, as if you want to withdraw your money before the end of the term, you are likely to face a penalty.
Why cash ISAs make good sense
As a saver, you need to remember cash ISAs, too, as these accounts offer an essential way to save income tax. Haine said: “This is especially important at a time when frozen or cut personal tax thresholds are dragging increasing numbers of people into paying higher rates of tax as their pay increases.”
When thinking about a cash ISA, you want to find the top rates to help you make the most of your tax-free saving. Just be aware that, as with other types of savings accounts, many of the top-paying cash ISA deals have disappeared following the recent interest rate cut. With this in mind, the same message applies: you need to act fast to get the top products before they get pulled. The good news is, some easy-access ISAs and fixed-rate ISAs are still paying around the 5% mark, so grab one of these if you can.
Don’t forget you’ll need an emergency fund
Take care not to lock away too much of your spare cash. It’s vital to ensure you have a robust emergency fund slotted away in an account where you can access your money at short notice. Haine said: “You should have easy access savings to cover three-to-six months’ worth of essential spending.” After this, you can then think about your options. Haine added: “For any cash you’re holding beyond this, it’s worth considering tying it up in accounts or cash ISAs for the periods that make the most sense for your finances.”
Think about stocks-and-shares ISAs, too
When looking at ISAs, remember the overall annual allowance is £20,000. But bear in mind that while a cash ISA can be a great home for short-term savings, if you’re slotting money away for the longer term, you are likely to be better off considering a stocks-and-shares ISA. This is because investing gives you a better chance of making your money grow thanks to compounding. It also gives you a better chance of beating inflation. Just be aware that it is not risk-free.
Make saving a priority
Whatever type of account you end up going for, if you’ve not already written ‘improve my cash savings’ at the top of your to-do list, then now is the time to do so.
By sitting back and doing nothing, you could be seriously missing out.
Bowes said: “Don’t kick yourself in the months and years ahead. Take action now and make earning more from your savings a priority.”
