Avoiding the savings loyalty penalty

10o October 2023

Almost a year after UK inflation hit a 41-year high, Britons' savings have, by and large, been diminishing in real-term value. Rising interest rates and the gradual decline of inflation have promised to reset the balance somewhat, giving consumers the chance to achieve far better returns on their savings. However, it has thrown into even sharper focus one of the major issues impacting people's finances right now: the stark difference between the base rate and the interest rates on offer through high street banks.

The savings loyalty penalty

In July, the Financial Conduct Authority (FCA) summoned UK bank bosses to a meeting amid concerns that they have been profiting from the rising Bank of England base rate (BBR) by failing to offer better savings rates to customers while the costs of mortgages and loans have increased significantly.

Yet despite this apparent failure from banks to pass on this savings boost to their customers, many across the UK remain hesitant to switch from high street banks, despite being aware that they could secure better rates elsewhere, new research from SmartSave has found.

SmartSave, a Chetwood Financial company, commissioned an independent survey of 2,000 UK adults to learn more about consumer savings practices. It found that only a third (34%) have opened a savings account with a new bank or savings provider in the past two years. Of those who have not made any changes to who they save with, most (62%) said they’re aware that they might be able to secure better rates with another provider.

In effect, people are being penalised for staying loyal to big banks. This is due to the smaller returns they receive on their savings.

Making the switch

To take advantage of the current high levels of interest, consumers need to be proactive and diligent with what they do with their savings and how they manage them. Searching the market for alternative products has become even more important, and branching out from established high-street names remains one of the best ways for people to lock in a better deal.

Here’s an example: some easy access savings accounts are still offering interest rates of just 1%, or less. There are also one-year fixed-term savings accounts offering interest rates in excess of 6%. For a saver in a position to do so, moving £5,000 from one of the worst-performing easy access accounts into one of the better-performing one-year fixed products would earn them £250 more in interest over the course of 12 months.

It's clear that for those in a position to put away a lump sum, the fixed-rate products currently available that are topping the base rate enable consumers to make the most of to grow their money. Crucially, these are covered by the same Financial Services Compensation Scheme (FSCS) protection as traditional banks, offering consumers security and peace of mind up to the threshold.

Sadly, many Britons are still being punished for remaining loyal to high-street banks that fail to pass on the current savings opportunity to their customers. However, the solution is in the hands of savers - by considering alternatives, exploring higher-yield savings options, and making an informed choice, they can ensure their money grows in value rather than erodes.