For the last few years, we’ve grown used to interest rates falling. The Bank of England responded to COVID by reducing interest rates to, pretty much, zero. There appeared to be little point in looking for savings accounts that might pay a decent rate of interest – and that’s been particularly true for businesses and trustees.
But the rise in interest rates has started to make it worth shopping around, as differentials have begun to emerge between the rates on offer. It’s fairly easy to get interest of more than 1.25% for instant access accounts now, and, if you are prepared to tie your money up for a year, interest of more than 2.25% is available.
There is still a noticeable difference between the rates that can be found on the internet and on the High Street. It’s easy to obtain interest of over 2.25% from a one year fixed term account, if you are happy with internet-based accounts, but you might struggle to find a High Street account in Sussex paying more than 1% – and you may have to make a long journey to open an account.
Some of the highest rates of interest available are from “Shariah-compliant” accounts. These accounts earn “profit” rather than interest and, although rates may look more attractive, they are not guaranteed. If you wish to open a Shariah account you should ensure you understand how this works. In other respects, Shariah accounts work similarly to conventional bank accounts and your capital is still protected by the Financial Services Compensation Scheme.
There are some companies, such as Raisin, Hargreaves Lansdown and Flagstone, which have made it possible to hold your savings in a range of different accounts using a cash management service. This approach can make sense for some people but it does carry additional risks (and it’s a bit too much to explain in a post like this!). If you are considering this type of service, we’ll be happy to discuss it with you and help you to decide whether you are comfortable with the risks, before you invest.
As interest rates rise, Premium Bonds become potentially less attractive. When interest rates were as low as 0.5%, if you didn’t win at all on Premium Bonds for a year, it didn’t feel like you had lost much at all. As interest rates rise, not winning anything can start to feel like you’ve missed out. However, National Savings has increased the “annual prize rate” on the Premium Bond prize fund to 1.4%. This means that if you owned all of the Premium Bonds available, you would get 1.4%, tax-free – a pretty good rate compared to an instant access account! But, as you can only hold a tiny fraction of Premium Bonds you will not get the average rate and, in most months, most holders win nothing at all. However, if you are happy to take a chance, Premium Bonds remain an interesting option, without any risk to capital.
In times like this, it’s essential to make your cash deposits work hard for you. We’d suggest that it is worth allocating some time to researching the best accounts, and, perhaps, getting comfortable with web-based savings accounts. We can, of course, help you, by pointing you in the right direction, and, if you would like some assistance, please let us know.
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
