Today’s skyrocketing savings rates are no more than savers deserve, after the Bank of England abandoned them in the wake of the financial crisis. It left millions who had scrimped and saved for years getting almost nothing on their hard-earned cash.
This was particularly hard on pensioners who had expected to live off the interest on their savings, but suddenly found they weren’t getting any.
It’s another financial crime on the BoE’s long charge sheet, but now it’s hiking interest rates at full speed in a desperate bid to curb the inflation that it helped create in the first place.
Today’s best buy savings rate pays a massive 6.15 percent a year, fixed for two years.
It comes courtesy of challenger bank FirstSave and requires a minimum deposit of £1,000, which rises to £5,000 if you want your interest paid monthly.
It’s the clear leader today. Beehive Money and OakNorth Bank both offer market-leading two-year fixed-rate bonds, but these have lower rates of six percent.
Beehive requires a minimum £500 balance with the maximum £250,000, while OakNorth can be opened with just £1 and savers can deposit up to £500,000.
Savers can scarcely believe their luck but today’s frenzied market leaves them facing two tough choices.
The first is to decide how long to lock away their money. As with most fixed-rate bonds, you cannot access your cash during the term, so you have to be absolutely sure you won’t need it in the next two years.
Those who want to get their hands on their money sooner can get 6.02 percent from OakNorth’s one-year fixed rate bond.
If you want easy access you will have to accept a much lower rate, although Shawbrook Bank’s 4.35 percent easy access savings account is the best deal we’ve seen in a long, long time.
Traditionally, longer-term fixed-rate bonds pay more than short-term bonds, but that’s not the case today.
United Trust Bank’s market-leading five-year fixed rate pays 5.76 percent a year for five years, well below FirstSave’s two-year deal at 6.15 percent.
RCI Bank UK pays 5.55 percent a year for five years.
Banks are paying less over the longer term because they expect interest rates to start falling sharply in a year or two.
If they’re right, United Trust Bank’s 5.76 percent rate could soon be an inflation buster, and it will be paid all the way to summer 2028.
By then, inflation should have fallen to around the BoE’s target of 2 percent, and today’s super-high savings rates will be a thing of the past.
It’s a gamble, though.
The second big decision savers face is whether to lock into a best buy fixed rate today or wait a while, because there is a pretty good chance rates will climb even higher.
Banks are now playing a crazy game of leapfrog, as they continually issue new deals to win a place at the top of the best buy tables.
This is likely to continue with the BoE expected to increase today’s five percent bank rate again next month, possibly by 50 basis points to 5.5 percent.
If that happens, best buy savings rates could fly as high as 6.5 percent in short order.
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Some forecasters reckon base rates could eventually hit 6.5 percent or even 7 percent, which would send savings rates higher still.
It’s not a done deal, though.
Once inflation shows signs of falling back, BoE rate setters may decide their work is done. When they “pivot” and start cutting rates savers could suddenly get a lot less.
Nobody can say for sure what will happen, so what should savers do?
It’s tempting to hang on and wait for rates to rise and rise, but there is an opportunity cost in doing this.
If your money is earning next to nothing today, say, in a low interest current account or easy access account, you could lose a heap interest while you wait.
Probably the best solution is to divide your savings across different accounts, with different terms, over the next few months.
With luck, that could give you the best of all worlds, while avoiding the worst.
Even if you don’t get the very best rate, you’ll still be getting a lot, lot more than you were just 18 months ago. At least there’s some good news out there.
