Savers put away record amounts of cash - but a third isn't earning any interest at all

Savers deposited five times more cash than usual in May, but a third of savings are languishing in accounts that don't pay any interest.

While the average national monthly deposit is usually £5bn per month, this rose to £25.6bn in May, according to data from the Bank of England.

People had been paying more into their savings accounts since the coronavirus lockdown began; £14.3bn was deposited in March, rising to £16.7bn in April.

Most of this cash was paid into instant-access accounts, £9.1bn of which won't receive any interest - meaning it will effectively lose value over time due to the effects of inflation.

Here, Which? looks at what's happening to savings rates right now, and weighs up the pros and cons of opting for an instant-access account over a fixed-term product.

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What's happening to savings rates?

It's no secret that now is not an easy time for savers.

Savings rates have been on the downward turn since April 2019, and the slide towards zero has picked up pace over the past few months. The real turning point came when the Bank of England cut the base rate to a historic low of 0.1% in March, with the aim of easing the economic effects of the coronavirus crisis.

The graph below shows how the average interest rates for instant-access and long-term fixed-rate savings accounts have fared since July 2010, using data from Moneyfacts. Long-term accounts are categorised as having a fixed term of 18 months or more.

As the graph shows, average rates have now fallen to their lowest point in 10 years. Before June 2020, the lowest average rate for an instant-access savings account had been 0.36% in April 2017, but today it's down to 0.24%. Similarly, long-term fixed-rate accounts slumped to 1.25% in January 2017, but have now dipped to 0.92%.

It's a similar story when it comes to top rates. The market-leading instant-access rate has fallen from 1.5% AER in July 2019 to 1.16% now. The top five-year fixed-rate savings account has fallen by 40% in 12 months, from 2.7% to 1.6% AER.

Why are savers opting for poor rates?

That savers are still flocking to instant-access accounts despite such low rates speaks to the economic uncertainty that's felt by many in the UK at the moment.

Instant-access accounts allow people to get at their money whenever they like, which will be important if they lose their job or have their salary cut.

However, it's also the case that many more accounts are paying next to no interest at the moment. In July 2019, we counted five instant-access accounts that paid 0.01% AER or less; in July 2020 this has jumped to 36 accounts. This accounts for one in seven instant-access accounts currently on the market.

Those with money to spare may have been spooked away from investments - which can offer higher returns - following the huge dive that markets saw at the start of the pandemic.

• Find out more:how to protect your pensions and investments amid stock market panic

Tips to avoid the savings slump

Despite the grim picture painted by interest rates at the moment, there are lots of things you can do to make sure your money is working as hard as possible.

Here are a few tips and ideas you could consider:

• Split up your savings: you don't need to put all of your eggs into one savings account. If you're lucky enough to have a sizable amount saved, it can pay to split it up into several accounts; you may be able to lock some away in a fixed-term account, and some you may want to invest or save elsewhere. It's good practice to keep around six months' expenses in an emergency savings account that has instant access, should you need to spend it.
• Try different types of accounts: instant-access and fixed-term accounts aren't the only options - you could also consider a notice account (which usually allows an unlimited number of withdrawals which are only paid after the notice period), or a regular saver (where you must pay in a certain amount each month, but withdrawals are usually allowed).
• Don't forget about current accounts:a number of current accounts offer better interest rates than traditional savings accounts; for instance, Nationwide's FlexDirect account pays 2% AER for the first 12 months on balances up to £1,500.
• Consider prizes instead: your savings won't earn any interest, but investing in NS&I's premium bonds will mean you're entered into a monthly prize draw where you could stand to win between £25 and £1m. Having said that, you might not win anything.

Questions to ask before opening a new account

Before opting for a new savings account, there are a few things you'll need to weigh up, as it's not all about the interest rate:

• Can you afford the minimum deposit?We've previously found that the majority of top accounts require a minimum initial deposit of £1,000. Others require much more, and some can be opened with just £1.
• Can you open and manage the account in a way that suits you? Whether you prefer banking online or like to do things in person, it's worth checking to see whether accounts you're considering offer the right option. Note that the coronavirus pandemic has meant some banks are not able to offer their full range of services at the moment, due to phone lines being busier than usual and some branches having to close.
• Is the interest rate competitive? You don't have to go for the top rate if the account doesn't suit you, but it's good to know if the rate you're receiving is at least competitive. If you've held an account for a while, there's a chance the rate will have been reduced since you opened it.
• Is the account covered by the FSCS? The Financial Services Compensation Scheme (FSCS) offers peace of mind in uncertain times; if your bank goes bust, your savings will be covered up to £85,000 per banking institution.
• Can you stick to the account's terms? Make sure you know what you're signing up for; some instant-access accounts only allow a certain number of withdrawals per year, while some fixed-term accounts won't grant early access to your cash.

Find out more:how to find the best savings account

What role does inflation have on savings?

The Consumer Prices Index (CPI) measure of inflation shows how prices of popular goods and services have changed in comparison to the same month of the previous year.

It was last recorded at 0.5% for May 2020, which means prices won't have increased too much since May 2019, but even a low inflation rate can affect the value of your savings.

If you leave cash to sit in an account that doesn't pay interest at a rate that's equal to or more than inflation, it means that the prices of goods and services will outstrip your money.

So, when you come to wanting to actually buy those goods and services, you won't be able to buy as much as you would have done the year before.