Over the past few years, UK headlines have detailed the rising base rate. This is the central interest rate set by the Bank of England (BoE) that essentially determines interest rates throughout the economy.
Following 14 consecutive increases from December 2021 to August 2023, the base rate now stands at 5.25% as of November 2023, the highest it’s been for 15 years.
As a result, rates on savings accounts have risen in accordance. An article from Moneyfacts reveals that the best easy access savings account rate on 15 December 2021 was 0.2%. In comparison, Moneyfacts data shows that the best easy access rate as of 10 November 2023 is 5.2%.
This has prompted many to consider moving their money in search of better returns.
If you’re receiving around 5% interest on your savings, this is comparably better than what you’ve likely been receiving in the past two years. So, if you have some cash in the bank, it may still be worth shopping around for an account with even more competitive rates.
Despite this, it’s important to temper your enthusiasm and look at the big picture, because there are certain things to keep in mind before you take advantage of these higher rates. Continue reading to discover three of these key considerations.
1. Rates aren’t necessarily high, simply higher than they have been
As mentioned, the base rate has risen considerably over the past few years, and the current rate seems much higher than the historic low of 0.1% on 19 March 2020.
However, data from the BoE highlights just how much the base rate has fluctuated over the past 35 years. Since the 1990s, the base rate reached:
- 14.88% on 6 October 1989
- 7.25% on 6 November 1997
- 7.5% on 4 June 1998.
As you can see, by having some perspective on the base rate and looking at the big picture, the current 5.25% doesn’t seem comparatively high.
Moreover, it’s worth keeping in mind that the current base rate is, in fact, lower than average. Trading Economics reveals that the average base rate between 1971 and 2023 was 7.1%.
It’s vital to keep this fact in mind, as interest rates on savings accounts often follow the BoE base rate.
So, while you may think that receiving an interest rate on your savings of around 5% is excellent, it’s important to remember that this isn’t actually that high, but rather simply higher than it has been over the last few years.
2. It’s wise to check any account rules before you consider moving money
Before you start searching for a new savings account with a more competitive rate, it’s crucial to carefully review any rules or terms and conditions. Otherwise, you may find that it’s more hassle than it’s worth.
For instance, while some accounts may offer attractive introductory benefits – such as higher rates, lower overdraft fees, or discounts on shopping – these could expire once your introductory period is over.
Moreover, the provider of your new account may have a minimum initial deposit, or ask you to pay in a minimum amount each month over the introductory period.
Additionally, applying for multiple savings accounts could affect your credit rating since banks must run a credit check for their overdraft facility. Which? states that this will only affect your credit score over the short term, so it may be wise to avoid switching accounts before you apply for any loans, such as a mortgage.
You should also remember that switching to an account with a higher rate could mean that you end up paying Income Tax on the interest you receive. That’s because you might exceed your Personal Savings Allowance – a tax-free threshold for interest earned – sooner if you receive more interest.
In the 2023/24 tax year, the Personal Savings Allowance is:
- £1,000 for basic-rate taxpayers
- £500 for higher-rate taxpayers
- £0 for additional-rate taxpayers.
So, if you’re benefiting from a higher rate of interest on your savings, you could quickly exceed the Personal Savings Allowance and find that you incur a tax bill on the extra interest.
3. Rates are variable and could fall again
While higher rates on your savings are appealing, it’s also important to remember that they are variable, and it’s not guaranteed that they’ll remain at current levels in the future.
Indeed, if the BoE base rate starts to fall again, rates on savings accounts may follow suit, and the interest you receive on your wealth could decline.
Of course, if you have a fixed-rate account, this may not immediately affect you. However, if you have another form of account – such as an easy access or notice account – you could be affected by a declining base rate.
This is because these forms of accounts typically offer a variable rate of interest, meaning it is subject to change at any time.
Furthermore, the BoE could rapidly reduce rates in response to significant events. For instance, the above historical data from the BoE shows that the base rate fell from 5% on 10 April 2008 to 0.5% by 5 March 2009 in response to the 2009 financial crisis.
The base rate also fell to its historic low of 0.1% on 19 March 2020 when lockdowns were imposed due to the Covid-19 pandemic.
As you can see, the base rate does tend to change quite quickly, and since rates on savings tend to follow suit, the interest you receive could also fall.
What’s more, experts predict that the base rate could start falling in the near future. According to This is Money, some experts predict that the BoE will cut the base rate to around 3% by the end of 2025.
In fact, the BoE already decided to keep the base rate at its current level of 5.25% at the past two consecutive reviews in September and November. So, this could indicate that this process of rates slowing may have already begun.
Get in touch
If you’re still unsure whether switching accounts to benefit from more competitive rates of interest on your savings is wise, then we can help.
Email email@example.com or call 0113 262 1242 to find out more.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.