UK households are always looking for ways to make their money go further amid the cost of living crisis, and savings accounts can help.
After years of low rates, high-yield savings accounts are having a moment as the Bank of England (BoE) kept interest rates at 4.75% in December. While homeowners face high mortgage rates, there is a silver lining in higher borrowing costs, and consumers can find UK savings accounts offering higher than inflation rates.
Inflation dipped to 2.6% in December, according to the Office for National Statistics (ONS), after two months of rises as hotel prices dipped and tobacco costs eased. Financial markets now assign a 74% probability to an interest rate cut at the Bank’s February meeting.
Savers should shop around to find the best deals and check what rate they are on — as they could still be sitting on a product that does not beat inflation. Providers have already started to lower rates as interest rates fall, so consumers need to check if their money is well-placed for higher returns.
Alice Haine, personal finance expert at Bestinvest, said: “Locking in the best savings deal possible, while rates remain higher, is the best inflation-beating strategy, particularly for those with cash languishing in an account delivering dismal returns.
“For those with sizeable sums in a savings account, that puts them at risk of paying tax on the interest they earn, a more tax-efficient strategy that takes advantage of the benefits that come with individual savings accounts (ISAs) and pensions is key at a time when frozen or cut personal tax thresholds are dragging increasing numbers of people into paying higher rates of tax as their pay increases.”
The main factor you should be aware of when choosing a savings account is the difference between easy-access and fixed-term.
Easy-access accounts allow you to access your money when you need it. Fixed-term means you can’t access your cash for the duration of the deal. They usually offer better rates, but you must be comfortable with not touching your savings for a long period, usually between one and five years.
What are the best high-interest fixed-rate accounts?
VidaSavings offers 4.77% for 12 months. The key condition is you need at least £100 to open the account, with deposits capped at £85,000.
Smart Save offers 4.76% with a one-year account for which you’ll need at least £1,000 to open. You can invest up to £85,000 in this account.
Habib Bank Zurich pays 4.75% for six months, with interest being paid on maturity, meaning at the end of said six months. You can open the account with £5,000 and invest up to £1,000,000.
Online banks typically offer higher rates than traditional bricks-and-mortar branches, which translate into better returns, giving you a more efficient way to save and reach financial goals.
Digital-only banking use has grown for the second year in a row, according to research from personal finance comparison site Finder, with superior interest rates as the biggest factor driving adoption.
Louise Bastock, money expert at Finder, said: “The continued growth in adoption shows that digital-only accounts are now a serious contender on the banking scene, rather than just the shiny new toy.
“This year’s study reveals that bagging a good return on savings is now the main motivation, rather than customers just treating digital banks as an easy-to-open secondary account. This suggests a shift towards Brits being more savvy with their savings, and seeing digital accounts as a genuinely viable product to support their personal finances, rather than just testing them out on the side."
If you prefer to go with a familiar name, the high-street lenders have slightly lower offers, but are still above inflation.
Tesco (TSCO.L) Bank offers the highest rate among high-street lenders, with a one-year fixed-rate savings account that pays 4.35%, with the minimum balance required being £2,000.
Nationwide (NBS.L) has a fixed-rate savings product offering 4% for one year. The minimum deposit is just £1 and you must be registered with Nationwide's online bank.
How do fixed-rate savings accounts work?
Unlike easy-access products, where interest rates can vary, fixed-rate accounts earn a set rate of interest for the period you choose, whether that's six months or one, two, three or even five years. Those are the most common deals, but some offers go up to 10 years and over.
You must leave your initial deposit for a fixed period without making withdrawals. If you touch your money, you forfeit any interest.
What are the best easy-access savings accounts?
Easy-access savings accounts let you withdraw your money without notice. With that ease of access come lower interest rates, but they are a good option for those who think they might need their money in a hurry.
Be aware that rates on these accounts are variable, which means they can go up or down. You will be notified of any change ahead of time.
Chip has a 4.85% deal available but limits you to just three penalty-free withdrawals a year. If you make more the rate falls by 1.1%. There is no minimum deposit and you can invest up to £1,000,000.
Atom Bank has a 4.85% deal that pays interest monthly or annually, and there is no minimum to open the account, which is done via your mobile. You can invest up to £100,000. For instance, if you invest £10,000 with them, you should expect to get £485.49 each year.
Sidekick has a 4.75% deal that can be accessed with £1. The rate includes including a 0.45% savings bonus (4.30% paid by OakNorth Bank, 0.45% paid by Sidekick). Another thing to note is that the bonus is payable on the first £35,000 of savings. After 12 months, the interest rate will revert to 4.30%.
Ulster Bank pays the same 4.75% and you will need £5,000 to open the account. Interest drops to 2% below a £5,000 balance.
There are even higher-paying easy-access accounts, but they are not for new customers. Santander's (BNC.L) Edge Saver, for instance, offers 6%, but is only available to current account holders.
What are the best notice savings accounts?
Can’t decide on whether you want to put your money away and not touch it for a long period or keep it accessible at all times? Maybe you should consider a notice savings account.
Notice savings accounts require you to give notice to your savings provider before you can withdraw your funds.
These are ideal for those who know when they might need their cash but don’t want to face the temptation of dipping into it at any time.
You need to give the bank or building society a set advance warning before you can withdraw your money — usually between 30 and 120 days.
Santander via Prosper has a 185-day product that pays 5.08%. You’ll need at least £20,000 to open it and can deposit up to £250,000. The platform also has a 4.95% with the same requirements
Oxbury has a 90-day notice deal that pays 4.90% that requires only £100 to open.
RCI Bank has a 95-day notice account that pays 4.75%. You need at least £1,000 to open it, which can be done online.
Interest rates with notice accounts are variable, which means they could go up or down over time.
What are the best regular savings accounts?
For those looking to make the most of their cash savings, regular savings accounts offer up to 8% returns.
Most regular savings accounts require you to put money away each month with interest paid yearly. It is not uncommon for the offer to be available only to current customers.
Principality offers 8% in a six-month regular saver account. You open an account and pay in up to £200 each month. Interest is calculated on the money in the account each day and paid six months after opening.
The Co-operative Bank has a 7% deal for existing customers. Fixed for one year, you can save up to £250 per month and can skip months without penalties.
First Direct also has a deal that pays 7%. You can open this account with £25, which is the same amount required to go into it every month. The maximum per month is capped at £300.
Every deal mentioned here is covered by the Financial Services Compensation Scheme, so you are protected up to £85,000 or double that if it’s a joint account.
