A new Which? Money survey, designed to reveal how our members feel about money and shine a light on the financial issues that worry them, has revealed that low savings rates are the biggest concern for people as we approach 2011.
Of the Which? members who participated in our survey, 52% said they were very worried or extremely worried about how much interest they were earning on their savings.
And according to our experts, they’re right to be concerned. Recent research conducted by the Which? Money team found that 47% of the savings accounts on the market paid paltry interest rates of 0.5% or less.
Savings account interest rates
With the Bank of England base rate at an all-time low, savings account interest rates have dropped significantly over the past two years. In November 2008, the highest paying instant access savings account on the market offered a rate of 6.52% AER, and the average rate available to a saver with £5,000 to put by was 3.59% AER.
Now, the market’s top instant access rate is 2.90% AER, but the market average stands at a lowly 0.87%.
With the Consumer Prices Index (CPI), the government’s preferred measure of inflation, standing at 3.3% for November 2010, the situation for savers looks bleak.
As prices rise, the value of your savings is effectively eroded – and with the rate of inflation outstripping many instant access savings rates, stashing your cash in a standard savings account means you’ll no longer generate a ‘real return’ on your money. So what are the alternatives?
Get the best rate on your savings
While times are difficult for savers, it isn’t impossible to find an account that pays a good rate. First and foremost, if you’re a UK taxpayer, consider putting your money into a tax-free Cash Isa. You can read more about the advantages of Isas, and how they work, in the Cash Isas explained advice guide.
Fixed-rate savings accounts are also a good bet for those looking to maximise the return they get on their money. The top five-year fixed-rate bonds are currently paying rates of 4.5% or more – but you will have to give up access to your cash for the entire term of the account in order to earn this rate.
‘One thing we’d urge everyone to do,’ says Which? Money editor James Daley, ‘is check the current rate they’re earning on their savings. Banks offer great rates when accounts are first launched, then cut them aggressively until their customers are earning virtually no interest at all.
‘Earlier this year, we found that UK savers are missing out on £12bn a year because their cash is held in ‘dormant’ savings accounts – poorly paying deals that banks have closed to new customers, but which are kept open for existing ones.
‘You could quickly and easily improve the return you earn on your savings by switching away from one of these accounts and getting a Best Rate savings account instead. The Which? savings booster tool was specially designed to make this process as simple as possible – so be sure to give it a try.’
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