Savers opt for easy access amid Brexit uncertainty: the dos and don’ts
The latest figures from the Bank of England showed a £5.5bn increase in the amount of money held by households, which is significantly above the £3.2bn average recorded over the past six months. The Bank put this down to an increase in the number of easy-access savings accounts that were taken out.
There are a number of factors behind the growing popularity of easy-access accounts. Firstly, the uncertainty surrounding the UK’s exit from the European Union (EU) has understandably made some savers risk-averse and willing to put off big spending decisions. In this context, easy-access accounts can very easily become a default option.
Likewise, there was a sharp sell-off in global stock markets during the fourth quarter of last year. Looking ahead, many investors suspect there will be further volatility ahead as the UK leaves the EU, global growth slows and the US and China try to resolve trade tensions. This means there is reduced appetite to put money to work in the stock market.
Finally, the Bank of England’s decision to raise interest rates to 0.75% in August is finally trickling down to the savings market, causing the interest rates on offer to gradually increase.
The launch of Goldman Sachs’ Marcus account also shook up the market, after the bank offered a market-leading rate of 1.5% at the time.
“We have started to see rates pick up over the past six months, not massively, but they are going in the right direction. When Marcus launched its product in September, it gave the sector a kick up the backside,” explained Andrew Hagger, founder of personal finance website MoneyComms.
If you are considering how to allocate your savings, here are a few points to consider when opening an easy-access savings account.
Firstly, make sure you do your research in order to find the best possible interest rate on offer. Savings Champion estimates that the average easy access rate currently stands at 0.53%.
Meanwhile, research by Opinium on behalf of investment platform Hargreaves Lansdown found that half of a sample of 2,000 people had not switched their savings account for five years or more.
What’s more, 40% had never switched their savings account or cash ISA.
It certainly makes a difference to shop around and switch. The top-paying easy-access account with no bonus pays 1.5% per annum and is offered by The Family, according to Moneyfacts. However, a £15,000 minimum investment is required.
The second highest rate available is from Virgin Money at 1.5%, with only a £1 minimum required.
ICICI Bank currently offers an easy-access account with 1.55%, including a 0.3% bonus for 12 months, followed by Marcus with 1.5% which also includes a 0.15% bonus for 12 months.
Hagger says it is important to note any bonus elements that make up the headline rate and suggests making a note in your diary of when the bonus ends, so you can look around in advance for a better rate when the deal ends.
Consider the inflation threat
Sarah Coles, personal finance analyst at Hargreaves Lansdown, suggests that savers take a ‘portfolio approach’ to their savings. This should help to protect your money from its arch-nemesis: inflation.
Over time, inflation erodes the value of your savings. For example, Coles points out that in the 50 years since the 10p was first launched, it has lost about 9.4p of its buying power.
This means you need to find a savings account which offers a higher interest rate than the rate of inflation, which currently stands at 2.1%. None of the easy-access accounts available beat the rate of inflation at the moment, so you don’t want to tie up all of your savings in this type of account.
If you adopt a portfolio approach to your savings, you could consider putting aside money into an easy-access account covering your outgoings for three to six months, as well as any money you need in the immediate future.
After all, one of the biggest benefits of this type of account is that it provides you with instant access to your money and is ideal if you need to access funds in an emergency.
You may also wish to use an easy-access account as a short-term solution if you plan to invest the money into stocks and shares but want to wait until market volatility abates.
Fixed rate accounts
After you have decided how much to put aside into an easy-access account, calculate the amount of money you might need over the next five years and place it in a number of fixed accounts with different maturities. This should hopefully provide you with some flexibility and give you a better chance of beating inflation.
For example, an 18-month fixed rate bond currently offers an expected rate of 2.32% from Sharia-compliant Al Rayan bank, while Gatehouse Bank offers 2.15% for a one-year fixed rate bond, according to Moneyfacts.
If you are willing to fix your money for longer, Bank of London & The Middle East (BLME) is offering 2.7% for a five-year bond.
Finally, Coles suggests placing the money that you don’t think you will need for five to 10 years plus into a stocks and shares ISA. Although there are risks associated with investing, over the long-term this should provide you with a higher return than you would make on a savings account.