Over the last few years, rising inflation and increased living costs have dominated newspaper headlines. In an attempt to bring inflation under control, the Bank of England (BoE) raised its base rate 14 consecutive times between December 2021 and August 2023.
While rising interest rates could be unwelcome news for mortgage holders, who may face increased costs, they could potentially benefit savers.
Indeed, the best easy access savings account interest rate on 6 November 2023, according to Moneyfacts was 5.16%.
In comparison, the Financial Conduct Authority (FCA) reports that the average interest rate on similar accounts in January 2022 was just 0.07%*.
As such, you may decide that you want to put your wealth into an easy access savings account instead of leaving it in a fixed savings account or investing it in the stock market.
On the surface, this might seem like an attractive idea as these accounts are easy to open and use, and interest rates are higher than they have been for a long time. Additionally, you don’t assume the same level of risk that you would if you invested in the stock market.
That said, there are some potential downsides to leaving your money in an easy access savings account and it may not be best suited to your financial plan.
Read on to learn whether an easy access savings account is the best place for your wealth.
The pros of an easy access savings account
You can access the funds whenever you need them
One of the biggest benefits of an easy access savings account is that you can normally withdraw the funds whenever you need them. This is useful if you need to use your savings to cover unexpected expenses like home repairs, for instance.
Conversely, if you put your money in a fixed-term savings account or invest it, you may not have easy access to the money at short notice.
In some cases, this could make you more susceptible to financial shocks as you may have to rely on expensive borrowing if you do not have enough easily accessible cash to cover unexpected costs.
You can switch whenever you like
Interest rates have increased quickly over the last few years. The FCA, for example, reported that the average interest rate on fixed-term savings accounts rose from 0.3% to 2.47% between January 2022 and May 2023.
By 6 November 2023, the top three-year fixed-term Cash ISA interest rate, according to MoneySavingExpert, had reached 5.37%.
If you had put your wealth into a fixed-term account in May 2023, you would likely have missed out on even higher rates in the future because you can’t normally take your savings out without facing a penalty.
However, if you use an easy access savings account, you can usually switch whenever you like without a charge. This means you can take advantage of the highest interest rate at any given time by moving your savings.
The cons of an easy access savings account
You may be more tempted to spend your savings
Being able to access your savings whenever you need them can benefit you when you face unexpected costs. Yet, it can be a negative as it means that you may be more tempted to spend your money.
This may not be an issue for you if you have a clear budget and are disciplined with your finances. However, if you are prone to impulsive spending, you may find that locking your wealth away in a fixed-term account or investing it is beneficial.
Inflation could erode the value of your wealth
While easy access savings account interest rates are currently higher than they have been in recent years, it is important to consider how they compare with inflation.
According to the Office for National Statistics (ONS), inflation was 4.6% in the 12 months to October 2023.
In comparison, the best easy access savings account interest rate on 6 November, according to Moneyfacts, was 5.16%.
As a result, your savings could be growing at a slower pace than the rate of inflation, as many savings accounts are offering rates below the best available. In practice, this means that your wealth loses value in real terms.
It is important to consider this, particularly during a period of high inflation, so you can protect your wealth and generate growth that helps you achieve your long-term goals.
You may be more likely to pay tax on your interest
Higher interest rates mean that you could see more growth on your cash savings. However, you may need to think about the potential tax implications of this.
If your savings are in an easy access account, you will likely pay Income Tax on any interest that exceeds your Personal Savings Allowance. In the 2023/2024 tax year, this is:
- £1,000 for basic-rate taxpayers
- £500 for higher-rate taxpayers
- £0 for additional-rate taxpayers.
Consequently, a higher-rate taxpayer would only need around £9,550 in a savings account with an interest rate of 5.25% before they started paying tax on the interest.
Yet, if you put your savings in an ISA instead, your money is shielded from Income Tax. You can contribute up to the ISA allowance of £20,000 in 2023/24 without a tax charge.
You miss out on potential investment returns
If you want to protect your wealth from inflation and achieve your long-term goals, you likely need to grow your savings. While an easy access savings account may generate some growth, you could be missing out on valuable investment returns.
Indeed, according to IG, the average annual total return – including reinvested dividends – from the FTSE 100 between 1984 and 2022 was 7.4%.
In comparison, according to Finder, the average cash savings account interest rate between 1990 and 2023 was 4.29%. Additionally, in eight of the last 10 years, cash savings interest rates have been lower than the rate of inflation.
So, while past performance doesn’t guarantee future returns and your investments could lose value, historical figures suggest that investing could provide better returns than an easy access cash savings account.
Easy access savings accounts may not be the most effective choice for long-term growth
Keeping some of your wealth in an easy access savings account as an emergency fund can be beneficial. You can easily access the funds when you need them, so you are prepared for financial shocks.
However, if you leave too much of your wealth in this type of account, it could lose value in real terms while inflation remains high.
As such, you may want to consider alternatives such as fixed-term savings accounts or investing your wealth instead. These options may be more useful in helping you achieve your long-term financial goals.
*Figures based on investing a £25,000 lump sum.
Get in touch
If you need some guidance about the role of cash in your financial plan, we are here to help.
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.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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 value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Approved by the Openwork partnership on 10/11/2023
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