Recent times have seen a dramatic rise in interest rates, and we’ve all seen the impact on monthly mortgage payments as a result, but what’s less publicised is how your savings could now be working harder for you. We take a look at some tips on how to make the most of higher interest rates.

A feature by MoneyHelper, a consumer-facing support service from the UK Government, highlights some key points that we can take some inspiration from.

Switching Accounts

With interest rates having shot up over the past two years, top rates are now ten times higher than they were, however according to Moneyhelper¹, you may need to move your savings around to access the highest rates.  

According to the Financial Conduct Authority, in December 2023 the average interest rate for instant access savings was 1.99%, and 3.52% for fixed rate accounts². While this is higher than the same numbers earlier this year, there are quite a few accounts paying 5% or more in interest for both fixed and instant access accounts¹.

Rising interest rates might mean that you’re spending more on your mortgage or other borrowing, but it can also earn you a bit extra on your savings. This is why it’s important to look around to ensure that your money is saved in the right places to benefit from increased interest rates.

Moneyhelper have put together some further tips on how to boost your interest rate:

1. Check that you’re using the right type of account. If you’re eligible, some savers may be able to earn up to a 50% bonus with a Help to Save account or 25% with a Lifetime ISA
2. Check what your savings currently pay. You can usually find the rate and if there are any restrictions or penalties for withdrawing cash:
   1. via online and mobile banking
   2. checking statements
3. Compare against the top paying accounts – have a look around online for comparisons on financial services consumer websites, or speak to an independent financial adviser.
4. Choose a new account to open. These days, most of the accounts paying competitive rates can all be opened online, and the process may only take a few hours to do. Moneyhelper have also put together some guidance – Get help before choosing an account
5. Move your money. Use your new account details to transfer or pay in money. 

If you have a fixed-rate savings account or bond, you’ll usually have to wait until it matures (ends) before you can do this¹. Other types of account should let you move money more freely, but always double check before starting.

Be prepared to move your money again

It’s a wise idea to check rates on a regular basis, as banks compete against one another to be the best, or have the most stand-out savings rates – be prepared that another bank may offer a more attractive rate in due course, and you may wish to move your funds accordingly.

Your bank might not increase your rate automatically 

Be prepared that even if your bank is offering a competitive rate to new customers, they may not offer the same to you automatically. It’s worth keeping an eye on the market and if you see a better deal, query with your own bank as to how you can take advantage of what’s being offered.

Will you pay tax on savings interest? 

There’s a set amount that people can earn in savings interest each tax year (6 April to 5 April) without paying tax, based on your annual income. Moneyhelper have put together a guide that covers how tax savings and investments can work – https://www.moneyhelper.org.uk/en/savings/types-of-savings/tax-on-savings-and-investments

Types of savings account

When it comes to finding accounts with the higher savings rates, there are different types available, with their own pros and cons –

• Instant and easy access accounts – these can be a good idea if you’re getting started with savings and might need to dip into them.
• Easy-access cash ISA – all interest is tax-free, you can save up to £20,000 before 6 April¹.
• Premium Bonds – no interest, instead you’re entered into a monthly prize draw¹.

Work around restrictions to maximise the return

Moneyhelper have put together a range of useful links for different types of savings and how to maximise these across the different types of accounts available:

• Lifetime ISA – offer a 25% bonus on savings used for retirement or buying a first home, you need to be aged 18 to 39 to open one.
• Help to Save – if you claim certain benefits you can save up to £50 a month for four years and earn a 50% government bonus. 
• Regular savings – let you save a set monthly amount in return for a higher interest rate, but you might not be able to withdraw money.  
• Fixed rate savings bonds – guarantee an interest rate for a set period between six months and seven years, but you can’t withdraw your money until the end.
• Fixed rate cash ISA – a guaranteed interest rate between one and five years, interest is tax-free and you can usually withdraw for a fee
• Notice accounts – to take out money you’ll usually need to give between 30 and 120 days’ notice.

In summary, this period of increased interest rates offers an opportunity for those with savings to consider how they may get more from their investments. The tips and methods shared here are all from the UK Government Moneyhelper website, which is packed full of advice and suggestions on how to keep safe financially. We hope that this is a useful feature and would always encourage you to seek professional advice from an Independent Financial Adviser before making any changes to your finances.

Sources

1. Moneyhelper (2024) Are you getting the best rate for your savings?. Available at: https://www.moneyhelper.org.uk/en/blog/savings/how-to-find-the-top-savings-accounts [Accessed 26 Feb 2024]
2. Financial Conduct Authority (2024). FCA update on cash savings – December. Available at: https://www.fca.org.uk/data/fca-update-cash-savings-december-2023 [Accessed 26 Feb 2024]

All the information in this article is correct as of the publish date 29^th February 2024. The opinions expressed in this publication are those of the authors. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.