By David Prosser
Finally. The decision this week by the Bank of England’s Monetary Policy Committee to reduce interest rates by 0.25 percentage points was a long time coming. There has been so much debate about when the MPC might begin to ease policy that it sometimes seemed as if it would never happen. But now, rates have come down to 5%, the first fall since March 2020, when the pandemic was just beginning.
Naturally, the initial focus of commentators has been on what this week’s reduction means for borrowers – particularly homeowners who are paying a mortgage. But it’s just as important to think about savers; in fact, they are actually a larger constituency, particularly given the large number of businesses and other organisations that hold cash deposits in different types of account.
Indeed, if you’re running an organisation with cash savings – or you’re responsible for this activity – it would now be sensible to take some time to review the implications of this change in direction in monetary policy.
Even in ordinary times, United Trust Bank’s own research suggests that too few organisations are proactive about securing the best possible deal on savings balances. One study on business savings United Trust Bank commissioned found small businesses were missing out on close to £2.29bn of interest each year by leaving cash in deposit accounts paying poor rates of interest, or even no interest at all.
In that context, this week’s rate reduction provides the motivation you might need to look at where your organisation’s cash is held. Bear in mind that many economic analysts expect this week’s rate cut to be the first of several reductions.
Plan ahead
Given such forecasts, all savers need to plan ahead, including businesses, charities and other bodies with cash in the bank. It may be possible to mitigate the effects of the base rate reduction announced this week, particularly if it is some time since you last reviewed your savings portfolio. And there are definitely steps you can take to reduce the potential impacts of interest rate cuts to come.
Your first move should be to identify exactly where your cash is currently held – potentially in several different accounts – and to establish what sort of interest rates the money is earning. Are your savings in instant access accounts, or are you required to give notice of any withdrawals to avoid penalties or loss of interest? Are you on a variable or fixed interest rate? How competitive is the rate compared to similar products?
Once you know where you currently stand, you can start to develop a savings strategy for the future. Would it make sense to move your money – and which accounts offer the best potential new home?
The basic rule of thumb in the savings market is that you pay a price for convenience and accessibility. That is, if you want to be able to get at your cash quickly, you should normally expect to earn a lower headline rate of interest on the money; by contrast, if you agree to a notice period for withdrawals – of 30, 60 or 120 days, for example, or even longer – you’ll get a bit more.
That principle holds broadly true in the current market environment. Right now, comparison websites show, the best instant access accounts pay around 30 basis points less in annual interest than the most competitive accounts requiring notice of withdrawals.
The position on fixed versus variable interest rates is a little more nuanced. Variable rates reflect the prevailing level of base rates – as well as factors such as the competitive environment and the provider’s appetite to win new business – and move up and down over time. Fixed rates are set in stone for an agreed term – anything from a few months up to five years – but are priced, at least in part, according to what the provider expects to happen to base rates over that period.
This means that when savings providers expect interest rates to come down, their fixed rates tend to be less generous than their variable rates, though the detail will vary according to the term of the product. The former may still be attractive – because variable rates may fall below today’s fixed rates over the term – but it’s very often a fine judgement about which will offer the best deal.
Be strategic
Against this backdrop, your organisation now needs a strategy for getting the best possible return on its cash savings. And importantly, that strategy could involve a portfolio approach – there is no need to hold all your cash in a single account; doing so may mean leaving some interest on the table.
Start by looking at savings you may need to get at quickly – cash held for emergencies say, or to smooth out short-term cashflow problems. This money clearly needs to be held in an instant access account where there won’t be any penalties for withdrawals, so look for the best possible deal on this type of product.
Next, identify any pots of savings you have earmarked for use at some time in the future. That might be cash you intend to invest as part of your business plan for the next year or two, say. This is money you can afford to tie up for a period, if doing so will earn you more interest.
In which case, consider notice accounts where you must give warning of any withdrawals but limit your choice to those where the notice required doesn’t take you beyond when you might want the money. Also look at fixed-rate products running for a term that is appropriate to your plans; depending on the rates on offer, these may protect you from further Bank of England base rate reductions.
Having made these allocations, your organisation may still have savings left over. This is money you don’t expect to be using for the foreseeable future – you can therefore look for the best possible rate of interest, even if this means locking the money up for a time. Again, you’ll need to consider the pros and cons of both variable- and fixed-rate savings products – or you could hedge your bets by looking for good-value accounts from both camps.
By following these steps, your organisation will likely end up with several savings accounts – each one should be appropriate for the plans you have for the money held in it and should be paying a competitive rate of interest. This is how you will get as much value as possible out of your savings, even in an environment of falling interest rates.
Stay vigilant
It makes sense to review your strategy regularly, particularly as and when base rates change in the future. Check your plans are still appropriate for your organisation’s needs – and that you’re still getting the most competitive deals on your various accounts. Don’t be afraid to change tack if necessary – but check for any penalties or loss of interest before moving money out of an account.
Finally, it’s always worth thinking about deposit protection. Most businesses are covered by the Financial Services Compensation Scheme, which will pay out up to £85,000 to savers who lose out because their bank or building society goes bust. But you should check that your savings account provider is part of the FSCS. It may also be prudent to limit savings held with any one provider to the £85,000 cap; this is another good reason to consider a portfolio approach to savings.
David Prosser is a freelance journalist and personal finance expert
This article isn’t personal advice. If you are not sure how to manage your savings, please seek advice from a professional Independent Financial Adviser.