Why an interest rate rise won't help dire savings rates

Interest rates set to rise

After ten years without an interest rate rise, there seems to be some light at the end of the tunnel for savers. The Bank of England has started showing signs that it is mulling over an interest rate rise, and the markets are pricing in a 55% chance of a rise by the end of the year. Unfortunately, this may not be quite the good news that it seems.

SEE ALSO: Where should I put my savings?

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Interest rates for savers have been falling through the floor for the past decade. Back in 2007 you could find a best-buy savings rate at around 6%. At the moment, even careful shopping around won't get you more than 1.25%. For those who are relying on interest on savings as part of their retirement income, falling rates have made a dramatic difference to their lifestyle for years.

According to figures from Hargreaves Lansdown, if you put £1,000 in a typical bank account in 2007, the effect of low interest rates being outpaced by inflation would mean that nowadays that £1,000 is worth just £878 in real terms.

The fact that the Bank of England Monetary Policy Committee is moving more in favour of a rate rise feels like it should be good news. Last month, in the wake of higher inflation figures, three of the eight committee members voted in favour of a rise from 0.25% to 0.5%, so there's a good chance that unless we get particularly bad news about economic growth in forthcoming months, the committee will tip in favour of a small rise.

The bad news

The trouble is that there's no guarantee that the banks will pass on a rate rise to savers. Unlike mortgage deals, savings rates aren't tied to the Bank of England base rate. Instead they are set by banks, which pay some attention to the base rate, but are driven far more by whether or not they want to attract your money.

At the moment, they don't really want your savings cash. Quantitative Easing means there's plenty of cheap cash sloshing around in the system already, so they don't need to pay more to attract it from savers. What they need far more is strength in their balance sheet when they come to be stress-tested by the authorities - and they're far more likely to be able to achieve that by keeping rates the same, and thereby improving their margins.

What can you do?

The only hope lies in the challenger banks. This year will see more than 15 challengers make their mark in the UK, and they are more likely to be competing harder for our cash. They are often keen to attract savings, to get a foothold in the market, so they have been offering better rates. There are therefore some attractive deals to be had for those who are willing to shop around - and to keep their eyes open at all times for a better rate.

There are good deals to be had from the likes of Atom Bank, which has a recent track record of challenging the market when it comes to fixed rate savings over between one and five years. Of course, when you tie your money up for a period, you need to bear in mind the risk that interest rates may rise during the savings period - leaving your account looking decidedly less competitive.

Many of the challengers are likely to focus on notice accounts, which are easier for them to make money from, but those that have been established a little longer may also offer decent instant-access savings rates too. However, the market moves quickly. Sometimes the most attractive deals are only available for a very short period of time, before the banks get all the savings they need, so it pays to keep your eyes peeled.

Eight celebrities who hate saving
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Eight celebrities who hate saving

“I am a spender,” the former Formula 1 team owner Eddie Jordon told The Telegraph. “I've always been like that. Have I got worse as I've got older? Probably, though I'd like to think I'm not irresponsible, but if there's something I see and want, then I'll get it. My mum has a great expression: "There's no hem in that garment." What she meant was that you can't put money in the hem of the garment as it was the place that little old Irish ladies would hide their money. Whatever money I've made, I want to use, while not dying in a poor house. I don't want to leave money littering the place when I go, where people have rows with each other.”

Advice from Jo Gornitzki, a spokesperson for MoneySavingExpert.com:

“Eddie is right when he says that leaving cash behind when you pop your clogs can cause family feuds - but only if you don't plan who you want to leave your money too. A bit of forward thinking - gifting money away before you die and drawing up a solid will - and the former motor racing boss can make sure his wife and kids won't come last in the money race.”

“I’m definitely a spender,” the footballer Robbie Savage told The Telegraph recently. “For me if I’ve got it, I spend it. If I’m broke in five years, I’ll have had a great time. It’s the most difficult lesson I’ve had to learn about money: you can’t take it with you. I like spending on cars, clothes, food and wine – the nice things in life. Even though I’m a spender, I’m also a grafter and I work exceptionally hard to keep it coming in. I’ve had people have a go at me for this, but I’ve had some unforgettable experiences because of my work ethic.

Advice from Kirsty MacDonald, spokesperson for accountancy practice Jackson Stephen LLP:

“There is no doubt that Robbie is one of the hardest working sports professionals in the UK. He is rarely out of the media spotlight what with his punditry work, newspaper columns and lycra clad manoeuvres following his SCD appearances. But relying on always being able to work to maintain a lifestyle is dangerous. Robbie should know that it only takes one false move in the media and he may never work again. Such a risky strategy should be balanced with a contingency plan to cover some income for a period of time in the event of catastrophe.”

“I’m a definitely a spender,” the former Status Quo guitarist Rick Parfitt told The Telegraph in January. “ I’ve never been one to save. I live for the moment and I’m fairly extravagant when it comes to people around me. In the past, I could not resist buying cars. I had a stable full of them – American cars, sport cars, limousines, everything. I spent hundreds of thousands on them. I had about eight or nine at any one time. The cars were just strewn all over the drive. I’d come out every morning, look at the weather and think, what car should I drive today?

Advice from Jasmine Birtles, founder of moneymagpie.com:

“Rick and other ageing rockers wouldn’t need to keep touring if they cut back on their spending and put the money instead into solid investments that grow over time and give them a regular income. It’s nice to be in a position to spend on the things you love but it’s a bit pointless spending so much that you have to keep working just to feed your spending habit. I always tell people to think about what they love and spend on that but save on things that don’t matter so much so that you can put money into savings and investments to work for you.”

“I am an unashamed spender,” former Blue Peter presenter Janet Ellis told The Telegraph. “I love shopping and I love the idea of a bargain and will shop online or in stores. We have a good lifestyle and don’t deprive ourselves of good holidays. I have in the past maxed out on credit cards and store cards, which I wouldn’t advise anyone doing. It was fun at the time, but in terms of how much you have to repay, it is ludicrous how much they charge.”

Advice from Jo Gornitzki, a spokesperson for MoneySavingExpert.com:

“As any girl knows there's nothing better than a bit of retail therapy every now and then. But the former Blue Peter presenter should be wary of maxing out on her cards. Credit cards are great - used in the right way. Used wrongly and they can end up costing you a fortune and in a mess that sticky back plastic just can't fix.”

“I’m definitely a spender, although I’m not an impulsive spender,” the James Bond actor Roger Moore revealed to The Sunday Times. “If I go shopping, I usually know what I want before I go out. I’m not a very good saver because the lessons my father tried to instil in me about taking care of money had the opposite effect. I carry cash in my pocket as I always like to have it to hand, which means it also disappears easily as I spend it more quickly.”

Advice from Kirsty MacDonald, spokesperson for accountancy practice Jackson Stephen LLP:

“As James Bond, Roger Moore became iconic as a smooth operator. But there is nothing smooth about the way he is handling his cash here. There seems to be no control over it at all. Whilst it’s hard to be sympathetic with multimillionaire film stars, Roger’s cash leakages are probably losing him a lot more than he realises.“

“I've got some savings for a rainy day, but I don't bother looking to see if I might get a better interest rate elsewhere,” the comedian Justin Lee Collins revealed in an interview with The Telegraph. “I don't have the time or the inclination to shop around at the moment.”

Advice from Jasmine Birtles, founder of moneymagpie.com:

“The sad thing is that Justin is at an age where even relatively small amounts of money put into a good investment like stocks and shares will grow into something really impressive in later life. The younger you are, the more time your investments have to grow and so the bigger they will be when you retire.

“The earning-power of a comedian can be volatile so it’s helpful to have a serious cash cushion to dip into in the bad times and help invest in your career to push it one when it seems to be faltering. It’s true that shopping around for a better savings rate right now can seem pointless but if you’re willing to tie your money up for a few years there are some good deals to be had, particularly in the peer-to-peer companies like Zopa, Ratesetter and Funding Circle. You can get, on average, between 4.5 and 5.5% with those at the moment, which is significantly better than ordinary savings accounts.”

“I’m definitely a spender,” the international playboy Howard Marks recently told The Telegraph. “When I was growing up I wondered what it would be like to win the pools. The prize money was something like £75,000. Later I had much more than that, with cardboard boxes of cash under my bed. I was very, very flash with my spending. I would fly first class, stay in five-star hotels, buy fast cars, big cars. I don't regret investing more wisely - I enjoyed it all.

Advice from Jo Gornitzki, a spokesperson for MoneySavingExpert.com:

“While I don't blame Howard for splashing his cash, the former drug smuggler and author should make sure his fortune won't go up in smoke. Yes, you should enjoy your money, but also make sure you have enough to last in old age.”


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