How to get a better deal on savings rates

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Banks are facing pressure to improve their savings offering after being accused of pocketing the difference on higher lending rates.

The Financial Conduct Authority will convene chief executives of the UK’s largest providers on Thursday as it challenges them to move further on cash savings. Banks have faced questions over their savings deals after the Bank of England raised its official interest rate to a 15-year high of 5 per cent last month.

Chancellor Jeremy Hunt last week called lenders in to Downing Street over savings rates and told MPs on Monday that he expected action from providers. It followed a similar move last month in which he insisted lenders support mortgage customers struggling with rising costs.

MPs have accused large banks of “profiteering” and widening their interest margin — the difference between their lending and saving offerings — at a time when many are experiencing high mortgage rates and cost of living pressures. The average rate on a two-year fixed-rate mortgage reached 6.51 per cent on Wednesday, according to data provider Moneyfacts.

Lenders insist decent rates are on offer for longer-term deposits, and that their decisions on savings rates are influenced by a range of factors, not only base rate movements.

What rates are on offer?
The current average easy-access savings rate is 2.48 per cent, according to Moneyfacts. This is double the average rate offered on equivalent accounts by the big four banks — HSBC, Barclays, Lloyds and NatWest — though some large banks have stepped up their efforts.

Nationwide on Wednesday announced it would increase rates on its easy access account to 2.15 per cent from mid-July, while HSBC last week said it would offer 1.75 per cent on its savings account.

These compare with rates as high as 4.25 per cent from other banks and building societies.

Households withdrew £4.6bn from UK banks and building societies last month as individuals drew down savings to meet rising costs, according to the Bank of England. Outflows were partially offset by net flows into fixed-term accounts and individual savings accounts (Isas).

Savers would be better placed switching providers, but inertia remains a problem, according to Anna Bowes of comparison website Savings Champion. “If people started to move their money, the banks would have to do something about that,” she said.

What happens if I fix for a period?
Those who fix for a period of time can benefit from higher rates, with the average one-year fixed account offering 4.8 per cent. Some small providers offer rates as high as 6 per cent, with savings covered by the £85,000 deposit protection scheme.

Providers typically charge a penalty for withdrawals from a fixed-term account. This can range from 90 days’ interest on a one-year deal to 360 days for a five-year deal.

Some banks now offer fixed-term accounts allowing savers to make a limited number of withdrawals before penalties apply. Paragon, for example, allows customers to make three withdrawals on its one-year fixed savings account before lowering rates to 1.5 per cent following a fourth withdrawal.

Are there any alternatives?
NS&I, the state-backed operator, raised the prize rate on tax-free premium bonds last week to 4 per cent from August, improving the odds of a win as it looked to raise deposits following a slowdown at the start of the current financial year.

This is the highest rate offered on premium bonds since 2007. It signals a shift in the provider’s strategy: for the past year it has focused on paying out larger prizes to the same number of people each month, but is now increasing the number of winners.

Sarah Coles, head of personal finance at Hargreaves Lansdown, cautions that those with larger deposits are more likely to win prizes, while the remainder may lose out on guaranteed interest rates offered elsewhere.

What happens if I stay with my provider?
Few have expressed confidence that rates offered by the big four banks will improve markedly following Thursday’s meeting, particularly as an influx of deposits during the pandemic bolstered bank’s balance sheets, lessening the need to compete for new savings business.

The FCA is considering improvements to how banks communicate rate changes with customers. This could mean informing them of new offers, but some industry figures have pushed for banks to go further and signpost switching services.

Regulators previously floated the idea of a single easy access rate for all providers but paused work in 2020 to prioritise dealing with the impact of the pandemic on consumers. Measures would have enabled providers to offer 12-month introductory rates to help lure new customers.

Should I be on guard for any taxes?
Frozen tax thresholds mean more people sitting on cash could be caught off guard, especially if these are big sums being held for future investment or to pay down a mortgage.

“People may well have fallen out of the habit of thinking about tax on savings,” said Coles. She said cash Isas were appealing for additional rate taxpayers, but rates were generally lower than equivalent savings accounts.

A one-year fixed cash Isa offers 4.49 per cent on average compared with 4.8 per cent on one-year fixed savings accounts, according to Moneyfacts.

The current personal savings allowance is £1,000 for basic rate taxpayers, tapering to £500 and £0 for a higher rate and additional rate payers, respectively.