The UK is a nation of cash savers, with half of Britain’s collective wealth sitting in instant access accounts. Inflation may stand below zero at present (it was -0.1 per cent in April), making cash a reasonably attractive option, but it will not stay there forever.
Indeed, research released earlier this week by Henderson Global Investors shows that inflation has cut the purchasing power of UK savings in cash accounts by £80bn since 2010. Cash savers who don’t look for the best deals could see their nest eggs depleted by current accounts which aren’t designed for long-term saving.
“Current accounts are increasingly chosen as a popular alternative for long-suffering savers. And extra incentives such as cashback, to boost savings pots even further, are an attractive lure away from historically low-paying savings accounts,” says Kevin Mountford, head of banking at MoneySuperMarket. He encourages savers to grab these rates while the UK is in deflation.
High interest rates on small sums are easy to find on the high street, with Nationwide’s FlexDirect account offering a competitive 5 per cent annual equivalent rate (AER) on the first £2,500 of your balance with no monthly account fee. But eye-catching rates are also available on larger balances.
Mountford says that a high in-credit interest rate current account is “a good way to make the most of your money, especially if you’re not in a position to tie up your cash in a traditionally higher paying fixed rate bond savings account.”
For those with higher incomes, he suggests accounts such as the Club Lloyds current account or the Santander 123 current account – “good options for those looking to maximise the interest they can earn”.
Santander gives you interest of 3 per cent on balances between £3,000 and £20,000 and cashback of up to 3 per cent on certain household bills paid by direct debit, for a monthly fee of £2. Meanwhile, Club Lloyds gives a 4 per cent annual return on balances between £4,000 and £5,000. However, monthly deposits of £1,500 are required, and the interest rate halves if your balance dips below the £4,000 threshold.
There has been a buzz around the savings to be gained from current accounts since the government announced plans not to touch the first £1,000 of annual interest earned by lower earners (£500 for those paying the higher rate). And the liberalised Isa system, meanwhile, which also has a record tax-free limit (£15,240 for 2015-16), will mean that savers will be able to withdraw and replace funds from the tax wrapper without affecting their annual allowance from autumn 2015.
“High interest current accounts could provide higher net returns than cash Isa for some savers in the short term,” says Danny Cox from Hargreaves Lansdown. Cox believes that these accounts are more likely to benefit non-taxpayers and basic rate taxpayers than anybody paying the higher or additional rate.
“For example, 3 per cent gross interest to a Santander 123 account holder is only worth 1.8 per cent to a higher rate taxpayer, only marginally above best buy cash ISA rates of 1.6 per cent. For me, retaining the ISA status is worth a 0.2 per cent lower interest rate.”
The tax benefits of an Isa are likely to build over time, as the annual allowance rises and interest rates go up, explains Cox.
THE LIMITS OF CASH
But the case for cash is not what it was. “Interest rates are not at the 4 to 5 per cent levels they were between 2005 and 2007,” notes Darius McDermott at Chelsea Financial Services, and there is the risk that cash will lose its value.
Investing in equities (which can be done through a stocks and shares Isa) can undoubtedly produce better returns over the long-term. According to Henderson, total returns on instant access savings since 1990 have amounted to 69 per cent, well below inflation of 122 per cent over the same period, while UK equities outstripped inflation six-fold.
Fidelity Personal Investing estimates that, if a saver had put £15,000 into the FTSE All Share index on 31 May 2005 and held it there until 29 May 2015, they would have £32,524.58. If the same £15,000 had been put into the average UK savings account over this period, they would have just £16,246.85. “That’s a difference of £16,277.73,” says Fidelity’s Maike Currie, “too big for any saver to ignore.”