They used to say you were more likely to get divorced than break up with your bank. The high street institutions we stick with for most of our adult lives are often the ones who offered us a free railcard at university.
But this should no longer buy our loyalty, as the amount of interest they pay is likely to be derisory. Despite 11 rate rises in a row from the Bank of England, some £256bn worth of cash in savings accounts is earning zero or very little interest, according to research published this week. On Thursday, the UK’s financial regulator warned MPs of “onerous interventions” if banks continued to profit from the customer inertia.
As more of us rediscover the long-forgotten savings habit, however, we are voting with our feet. Record numbers of consumers switched banks in the final quarter of 2022, according to the latest data from the Current Account Switching Service. The annual total of 1mn switchers was up 20 per cent on the year before; the quarter figures due next week are likely to show further progress.
Much of the motivation behind this change from banking customers is the ability to now get higher interest on your savings. In the UK, banks including HSBC, NatWest and RBS additionally offer cash bungs of £200 to move your money — something that’s proving extremely popular during the cost of living crisis.
I spoke to one banking insider this week who suggested the high level of churn from “serial switchers” is starting to be counterproductive for the banks. “The people switching are money savvy, but they’re not the most profitable customers,” she said, alluding to the high cost of onboarding them, only to lose them to a rival a year later.
However, costs could skyrocket if regulators insist that banks increase interest rates on existing customers’ savings accounts, many of which are still less than 1 per cent. Of course, savings rates aren’t the only reason to break up (or make up) with a bank. Customer service is important too, and this costs money. So it’s important that consumers have a choice.
Satisfying our different banking needs increasingly involves having more than one bank account. Digital banks such as Monzo and Starling have attracted millions of customers with fee-free foreign spending and budgeting tools. The functionality of setting up separate savings “pots” and “spaces” is valuable, even if the interest rates on offer are small.
In any case, younger, digitally savvy banking customers haven’t seen rates like these in their entire working lives. If they want to get a higher rate of interest, they can do it on their phones in a few clicks. The speed and ease with which the digital generation can transfer money away is a new and worrying problem for the banks.
Although no accounts pay close to the high rate of inflation, it’s never been easier to ensure your emergency fund and short-term savings are at least earning something. New banking entrant JPMorgan Chase UK has attracted large volumes of customers by offering 3.1 per cent interest on savings of up to half a million pounds, and 1 per cent cashback on purchases. One aim is to get wealthy customers to open an investment account with Nutmeg, the digital wealth manager it acquired in 2021. Some 30,000 customers have signed up since Nutmeg went live on the Chase app in February.
However, holding too much of your long-term savings in cash can be a costly mistake. Although investors remain jittery about the markets, the novelty of earning interest on cash savings could be wiped out by future tax bills. Since April, Brits with an annual income above £125,000 are additional rate taxpayers, and must pay 45 per cent tax on savings interest. The tax shelter of Isas are the obvious answer. The top cash Isas pay just over 4 per cent, but a transfer logjam has emerged as savers attempt to access the best rates.
You can also hold up to £50,000 in Premium Bonds and while no interest is paid, prizes are tax free. The “prize rate” is currently equivalent to 3.3 per cent and could well rise again as the chancellor increased the funding target for National Savings & Investments, the state-owned savings bank, at the Budget last month.
Another fast-rising trend is holding money market funds within your stocks and shares Isa. These offer a comparable yield to the prevailing base rate, and typically invest in short-dated government bonds. They’re not risk-free, but as a short-term strategy many investors are adjusting the balance of their portfolio as they ponder their next move.
For investors and savers, cash is a flexible friend in uncertain times. As rates look set to rise further, wherever you’re holding yours, make it your mission to get it working every bit as hard as you do.
The writer is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb
Source: Economy - ft.com
