Top tips for making the most of high interest rates
Interest rates in the UK are currently higher than they’ve been for over a decade. It’s bad news for mortgages, but it’s great news for your cash savings. So, I’m giving you some top tips to help grow your cash savings while rates are high.
Find out what you’re currently earning
Step one. If you’ve got money stashed away in savings accounts but you haven’t checked your rate for a while, now’s the perfect time. A lot of banks and financial service providers have upped their rates consistently over the last year to remain competitive.
For example, here are the rates that Moneybox offered on its savings accounts in 2022 compared to what we’re able to offer now in 2023.
|Simple Saver||0.74% AER (variable)||4% AER (variable)||Shawbrook|
|32 Day Notice||1.20% AER (variable)||4.66% AER (variable)||Investec|
|95 Day Notice||1.25% AER (variable)||4.96% AER (variable)||Investec|
|5%* AER (variable)||HSBC
So, you could already be earning more interest than you think. And if you’re not earning a great rate, you’ll at least have a base level of what you’re currently earning before you start looking at other accounts from different providers.
Our Simple Saver account lets you withdraw once each calendar month. For our Notice Accounts, withdrawals are subject to a notice period.
*As of 04/10/2023. 5% AER (variable) includes a bonus rate of 0.85% for the first 12 months. A lower rate of 0.75% AER (variable) applies if account conditions aren’t met.
Shop around for the best rates
Following on from that, you should make a habit of regularly shopping around. In a high-interest environment, complacency with your personal finances can really cost you. With heightened competition, high street banks are unlikely to provide the very best interest rates on the market, so it’s important to look into a number of providers and be prepared to move your money to maximise the interest you’re earning on your savings.
It’s uncertain how long rates will remain as high as they currently are, so right now could be the best time to take action if you haven’t already to ensure your money is in the best account to help you achieve your goals.
Review your current account
Don’t forget to review your current accounts. You probably don’t want to be changing your current account once a month. But, at least once a year, you should be checking the market and seeing if you can get value elsewhere.
Some current accounts now offer interest on balances, which hasn’t been the case for some time, and cash back on everyday spending. Banks also frequently entice new customers to join by offering cash or cash equivalent rewards – so it’s always a good idea to have a look at what else is out there and which incentives you could make good use of, both for a potentially higher interest rate, and any cash or cash back rewards.
Explore different savings accounts
The interest rates offered on savings accounts can vary significantly depending on the provider, how flexible the product is, and how easily you can access your savings. Easy access saving accounts will likely offer a lower interest rate than short-term notice accounts or fixed-term saving accounts.
This means that you might be able to maximise the interest you earn on your savings by matching the term of your deposit with the timeframe of your goals. For example, if you’re saving for your wedding, you’ll know roughly how far away in the future you’ll need access to your savings.
Consolidate your pots for better gains
Check whether having a higher balance in an account leads to higher interest rates. Some providers offer better savings rates for higher balances so it may be worth combining the balances of your different savings accounts to make the most of this. Just make sure you check you’re covered by FSCS protection (up to £85,000 for each bank).
Don’t forget about tax
Don’t be caught out by tax. We haven’t had to worry about paying tax on our savings for a very long time because rates have been so low but with rates having rapidly risen, millions more savings accounts are now liable for tax this year.
With a Cash ISA you never pay tax on interest. Plus, any interest you earn in a Cash ISA doesn’t count towards your personal savings allowance, so if you’ll earn a lot of interest you can protect more of it in an ISA. We’ve included the thresholds for personal savings allowances below (this is the interest you can earn on your savings in a regular savings account before you have to start paying tax on it).
- Basic (20%) rate taxpayers can earn interest of £1,000 tax-free each year
- Higher (40%) rate taxpayers can earn interest of £500 tax-free each year
- Top (45%) rate taxpayers don’t get a personal savings allowance
With these figures in mind, basic rate taxpayers would need around £20,000 in a regular savings account to start paying tax on their interest. If you’re a higher rate tax payer, you’d only need £10,000.
So a Cash ISA and its tax-free benefits might be more applicable to you than you think. These numbers assume that you’re earning around 5% interest on your savings in a regular savings account.
Confirm the interest you’re earning on cash in your investments or pension
Don’t forget about any cash you hold in investment or pension accounts. Many people keep a cash balance in these accounts that isn’t yet invested, and your provider should be paying you a fair rate on this cash.
Ask your investment or pension provider how much interest they are paying on your cash, and compare it with other providers to ensure you’re getting a good rate. If you’re not, there’s no harm in going back to tip one and shopping around.
Saving should go hand-in-hand with investing
Find the right balance between allocating your money to cash savings and investing. In a rising high-inflation environment, competitive interest rates on savings products have an important role to play in any robust financial plan. That said, historically investing remains one of the best ways to grow your money over time and offset the impact of inflation.
Both saving and investing are well-suited to help you achieve different financial goals. Saving should be where you park your short- to medium-term money: that’s your emergency fund, or your savings for home improvements or your next holiday. Investing on the other hand, can help you achieve financial freedom over the long term.
Remember that compared to saving, investing carries risk and you might get back less money that you put in if you don’t stick to a long-term timeframe.
Keep inflation in mind
Leading on from the previous tip, I want to reiterate that we shouldn’t forget about the impact of inflation. It’s one of the biggest mistakes savers and investors make, because inflation has a very real effect on the value of their money. When the interest rate on your savings, or the returns on your investments, are lower than inflation, your money is losing purchasing power.
While there’s no sure-fire way to protect your money from the effects of inflation, it’s important to not stick your head in the sand. And, always calculate your real returns (the current rate of inflation, minus the interest rate you’re earning on your savings), so you can take it into consideration when tracking your progress against your financial goals. As an example, if inflation is at 7% and you’re earning 5% interest on your savings, you’re actually going backwards by 2%. So you need to get the best interest rate possible to minimise the damage of inflation
That’s it for this special savings one-off. I hope these tips will help you move forward with your financial goals with confidence and empower you to make beneficial decisions. Make sure to check out the other content that me and the Moneybox Team produce for more tips on how to achieve your goals – whatever they are.