Savers Dump Fixed-Rate Savings to Wait for Interest Rate Rise

Long suffering savers are ditching fixed-rate bonds and tax-free cash ISAs in their droves and turning to flexible, easy-access accounts, recent data indicates.

Fed up with low interest rates, there’s a growing number of savers who expect that interest rates will soon rise.

The slightly higher rates earned by tying their money into a fixed-rate bond isn’t enough to keep some savers from the flexibility of an easy-access account.

The best one-year fixed rate is 1.95% from Atom Bank. Or 2.1% with the same bank, but for a two-year fixed rate.

Savers will earn 0.7% extra for the inconvenience of locking into a one-year fixed rate, compared to the best rate easy-access savings account.

However, Bank of England figures show that £3.7bn has left fixed-rate bonds between April and July this year alone. In the same four months, £504m poured out of Cash ISAs.

It seems clear that savers are not prepared to get locked in to a low rate if rates increase within the next 12 months.

Cash ISA Savings Fall

This fall in cash ISA saving has been helped along by low interest rates, the personal savings allowance and the invariable negative returns.

Savers can earn up to £1,000 in interest each year tax free, this is known as the personal savings allowance that came in on 6 April 2016. However, this amount differs for higher-rate tax payers.

There were 1.6m less ISA accounts opened in 2016/17. Note: this wasn’t effected by the increased limit on ISA contribution in 2014/15.

Experts warn savers not to ignore cash ISAs, they are still tax-free homes for cash.

The Best Rate Easy-Access Savings Accounts

Some easy-access savings accounts limit the number of withdrawals you can make in a year, and some won’t pay the interest earned for the month a withdrawal is made. However, there are some great options available.

The eSavings account from the Ulster Bank (RBS owned) offers 1.25% AER – the account allows unlimited penalty-free withdrawals, and you can open it with just £1. You need a card and card reader to withdraw money.

The HiSAVE SuperSaver from ICICI Bank UK pays the same rate of 1.25% AER – but you’ll need to have at least £500 saved. If your balance falls below this, you’ll only earn 0.65% interest.

You also get a fixed bonus of 0.6% for 12 months with this one and can make unlimited withdrawals.

UK interest rates could rise

Low interest rates haven’t helped the situation either. Interest rates haven’t risen since July 2007, but The Bank of England have hinted that it could rise from its historic 0.25% low.

In June, three members of the Monetary Policy Committee voted to raise interest rates to keep a lid on inflation. Inflation is currently at 2.6% and could spiral out of control.

So could the tide be changing? An interest rate rise would be welcomed by millions of long-suffering savers. But for some, mortgage repayment costs would increase.

The Centre for Economic and Business Research say interest rates will increase towards the end of 2018, while Capital Economics are expecting a 0.25% interest rate rise by mid 2018.

It’s certainly a case of wait and see for many savers who are seeking flexibility with their finances until (and if) the rates do rise.

Charlie Howells

After finishing his business studies degree at Bath, Charlie has been involved with a number of startups and finance companies. He regularly writes about personal finance and works as an analyst and writer for Best Savings Rate.