Cash savings are a simple way to hold your wealth, and you do not normally assume much risk. You can simply deposit the funds and let them generate interest until you need to use them. If you put them in an easy access account, you can withdraw your savings at any time without a fee.
This is ideal if you want to build an emergency fund or set money aside for a large purchase in the future. However, you may not be getting the most out of your cash savings if you do not take an active approach to managing them.
You might be missing out on the best interest rates, or you could be paying more tax than you need to on any interest you generate. Additionally, you could be overlooking the effects of inflation on your wealth.
Fortunately, by paying more attention to your cash savings and making changes when necessary, you may be able to avoid these issues.
Read on to learn how taking a more proactive approach could help you maximise your cash savings.
1. Use your full ISA allowance
If you have cash savings in a non-ISA account, you will usually pay tax on any interest that exceeds your Personal Savings Allowance. This is dependent on your marginal rate of Income Tax.
In the 2023/24 tax year, you have a Personal Savings Allowance of:
- £1,000 if you are a basic-rate taxpayer
- £500 if you are an additional-rate taxpayer
- £0 if you are a higher-rate taxpayer.
You will normally pay tax at your marginal rate of Income Tax on any interest that exceeds this threshold.
Conversely, you do not pay any tax on the interest that you generate from savings in a Cash ISA. As a result, making use of this excellent tax wrapper could help you mitigate the tax you pay.
In the 2023/24 tax year, you can contribute up to £20,000 across all your ISAs. It may be beneficial to use as much of this allowance as possible before saving elsewhere.
2. Shop around for the best rates
The interest rates on cash savings accounts have risen considerably in recent months. This is because the Bank of England (BoE) increased the base rate 14 consecutive times – before settling on 5.25% – in an attempt to combat high inflation.
In turn, this caused an increase in cash savings interest rates. According to Finder, the interest rate on a variable Cash ISA in October 2022 was 1.7%. The following year, in October 2023, it had risen to 3.25%.
On 3 January 2024, Moneyfacts reported that the best easy access savings account interest rate was 5.1%.
Yet, many savers are not benefiting from these rates because they leave their savings in old accounts with very low interest rates. Such inertia could mean you miss out on a significant amount of interest, making it more difficult to achieve growth that keeps pace with inflation.
You rarely receive any benefits for loyalty, so it may be useful to shop around and move your cash savings into an account with a higher interest rate.
3. Consider fixing for a better rate
Interest rates have risen considerably in recent months, but it is important to remember that they may not stay at their current levels. In fact, they could fall again in the near future.
This may be likely because the BoE raised their base rate to control inflation. According to the Office for National Statistics (ONS), inflation was 3.9% in the 12 months to November 2023.
This is far lower than the high of 11.1% in the 12 months to October 2022, and the rate of inflation has been steadily decreasing in recent months.
As a result, the BoE could bring the base rate down, and this might mean that bank interest rates will also fall. That’s why you may want to consider a fixed-term savings account so you can lock in a more favourable rate.
Additionally, fixed-term savings accounts may offer a higher interest rate than easy access accounts.
However, you typically cannot access your savings for the duration of the fixed term without paying a penalty, and this could be an issue in certain circumstances. For example, you might need to spend cash in an emergency fund at short notice, so a fixed-term savings account may not be suitable.
4. Look for lost savings
It may seem unlikely that you could forget about your own cash savings, but it is more common than you might realise.
According to Which? there’s an estimated £4.5 billion sitting in dormant bank and building society accounts that people have lost track of.
This often happens if you move house and forget to update your address, as you miss out on vital correspondence. You might also open a new account and forget to move some savings from your previous account.
It may be beneficial to check for any forgotten savings using the My Lost Account service. This free tool can tell you whether you have any old accounts with more than 73 different providers, including National Savings & Investments (NS&I).
5. Don’t underestimate the power of inflation
Shopping around for the best deals, saving in an ISA, using fixed-term accounts, and tracking down lost savings could all help you maximise your wealth. However, it is important to recognise the potential shortcomings of cash savings.
You may need to consider the effects of inflation, in particular. This is because, when the rate of inflation is higher than the interest rate on your cash savings, your wealth may lose its real-terms value.
This happens because the cost of goods and services increases faster than your savings can grow, so you cannot afford to buy as much as you previously could.
Currently, as the rate of inflation has fallen, your cash savings may be more likely to grow enough to maintain their value. Yet, as recent events have proven, inflation could well go up in the future and reach the high levels we have seen in the past few years.
Additionally, even when you have a favourable interest rate, inflation could still dampen growth and make it more difficult to achieve your financial goals.
Fortunately, by considering alternatives such as investing, you may be able to combat the effects of inflation and protect the spending power of your wealth.
Get in touch
We can discuss the best ways to maximise your cash savings, and some alternative ways to hold your wealth that may be more suitable for your financial plan.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
An ISA is a medium- to long-term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen.
The Financial Conduct Authority does not regulate NS&I products.
Approved by the Openwork partnership on 03/01/2024.
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