BLOG: The year that’s been and the year to come – what next for savers?
We’ve seen the tragic war in Ukraine; a surge in energy prices; a rapidly rising Bank of England base rate, taking us to levels not seen since the height of the 2008/09 financial crisis; and worsening cost-of-living issues impacting the entire country with inflation now in double digits.
Anyone predicting all that coming to pass 12 months ago would have needed a very big crystal ball indeed.
Inevitably these events have had a direct or indirect impact on the savings market. Most obviously, rising interest rates are nominally good news for savers and we have seen pay rates steadily rising across the year.
This time last year, typical leading Easy Access rates were well below 1% compared with around 2.5% now. Similarly, in the popular 1 Year Fixed Rate category, rates have increased from around 1.4% to 4.5% or so.
While welcome, these rates remain below the rate of inflation – currently running at 10.7% – meaning the real rate of return is negative.
Competition among providers remained intense with new rates often being withdrawn within days of being launched. The best rates have invariably been offered by the smaller, ‘challenger’ banks such as Aldermore.
In contrast, the larger more established providers have been slower to react ,meaning the gap in market rates has increased; and this is expected to continue as rates rise further in the coming months.
The message to savers is clear: review your current rate and consider shopping around for a better rate.
Searching for better rates is quick and simple via online comparison websites. And with online account opening and faster payments, you could be earning a better rate on your hard-earned money on the same day that you apply. So why not find an hour on Boxing Day to take a look or make it an early New Year’s resolution?
Where are savers stashing their cash?
Looking at the data for the entire market over the last year, the overall market has grown by 3% to reach an eye-watering £1.46trn.
In terms of product type, the most popular categories are Fixed Rates and Easy Access. The former reflects a steep rise in pay rates; the latter probably reflects customers prioritising access in uncertain times.
The main casualty was ISAs, which contracted by 1.7% – reflecting generally lower pay rates than non-ISAs and the ongoing impact of the Personal Savings Allowance, which shields most savers from tax on their interest earnings.
Aldermore’s annual ‘Savings Tracker’ survey which monitor the attitudes and behaviours of savers in the UK revealed that this time last year, nearly half of people cited the rising cost of living as their top financial worry amid record levels of inflation and energy price hikes.
Further, a third hadn’t made any plans to mitigate the rise in living costs. On a brighter note, for those able to work from home, the survey revealed that savings of nearly £3,000 were being achieved over a six month period through lower commuting costs and eating out.
Whatever your circumstances, it’s always a good idea to draw up a budget, consider cutting out unnecessary expenditure – do you really need that takeaway? – and putting aside any surplus cash into a savings account.
Getting into good financial habits can really make a difference to your financial position and resilience.
Looking ahead into 2023, what lies in store?
Firstly, interest rates are set to rise further with experts forecasting the Bank of England base rate to exceed 4% in the first few months of the year. Healthy competition means that savings rates inevitably increase across all product types – Easy Access, Fixed Rates, ISAs etc.
2023 will also see the introduction of new consumer protection regulation from the Financial Conduct Authority.
‘Consumer Duty’ rules will require financial services firms to deliver good outcomes for customers. This raises the bar for banks and building societies to think and do better, and it will be interesting to see how this plays out.
My view is that the ‘challenger banks’ are well placed to embrace this new regulation. Many will already meet the new standards because they have built their business on ‘doing the right thing’ and have fewer ‘legacy’ issues than established providers.
I expect to see providers rationalise and simplify their product range, review their communications to make sure they are not misleading, and invest more to improve customer service. This is all good news for savers, particularly against the backdrop of more challenging economic circumstances.
Aldermore is supportive of the previously proposed Single Easy Access Rate. Regrettably, this was shelved during the Covid crisis, but we remain of the view this is a progressive piece of regulation that is pro consumer, pro switching and pro competition.
While I don’t expect this initiative to re-appear in 2023, there’s nothing stopping savers from reviewing their existing rate and comparing deals in the market. Do you know the rate you’re getting now? If not, make sure to check and see if you can improve it as we move into the New Year.
It’s been a very dynamic last 12 months on a range of fronts. But for savers, a rising rate environment is always welcome and many of us will be enjoying returns on our money not seen for years.
The market for savings is very competitive and along with new regulation, the outlook is a positive one, particularly with inflation set to come down next year.
If 2022 was the year you left your hard-earned cash languishing in a low-rate account, make 2023 the year you seek a better return. After all, it’s your money, not the bank’s.
Ewan Edwards is director of savings at Aldermore