- £280 billion is sitting in UK accounts earning no interest, according to the latest figures released today by the Bank of England
- Just a 3% return on last year’s zero-interest cash could have earned savers £6.9 billion
- Inflation is eroding the value of idle cash
- The last time interest rates were at 4.5% in October 2008, just £39 billion was sitting in zero-paying accounts
- Six ways to avoid zero-return accounts
Laura Suter, director of personal finance at AJ Bell, comments:
“If you want one figure to sum up the apathy of the UK’s savers, it’s the fact that £280 billion is sitting in accounts earning absolutely no interest, at a time when interest rates are north of 5% for some savings accounts.
“The latest Bank of England data to the end of March shows that there is a mountain of cash paying no interest, which has ballooned in recent years despite the Bank of England’s base rate rising and savings rates remaining decent. The pile of cash getting no return has grown in the past year, by £51 billion.
“The nation is missing out on millions of pounds of potential returns on their money. Even if the £230 billion sitting in zero-paying accounts a year ago had earned a rather pedestrian 3% return on the cash in the past 12 months, it would have made the nation £6.9 billion richer.
“Not only is the money not earning any interest, it’s also being eaten away by inflation. While inflation has dropped from its double-digit highs, it is still chipping away at the spending power of your money each year. Keeping the money in your current account or an old savings account earning nothing is as good as stuffing it under your mattress – although admittedly the latter is probably a more comfortable option for sleeping at night.
“The last time interest rates were at 4.5% was in October 2008 and at that point just £39 billion was sitting in these accounts paying no interest. The amount languishing in zero-paying accounts grew during the period where interest rates were below zero, climbing to £154 billion in July 2019. The slashing of base rate during Covid only boosted the cash pile further, rising to £231 billion during a period where rates hit a low of just 0.1%. But the jump in the base rate since then has done nothing to dent the pile of money earning nothing, and in fact it grew to reach a peak of £282 billion in November last year.
“It’s been mooted that the government is planning to cut the amount of money people can hold in Cash ISAs, as a way to help move more people into investing. But people also need to take action themselves to ensure that they are getting the most from their cash. The top paying easy-access savings account is paying 4.59% currently, meaning those with £15,000 in savings could be earning £688.50 a year in interest. Assuming no other savings income, this would be covered by the personal savings allowance, meaning it is tax free. Those with meatier savings of £50,000 are missing out on potential annual interest of almost £2,300.
“One option for those who want a return on their money and to get started investing is AJ Bell Dodl’s Stocks and Shares and Lifetime ISAs, which pay interest of 4.58% AER variable on cash while you decide where to invest your money. The account offers easy-to-understand guidance, with the interest rate helping beginners to grow their money while they learn to invest.”
Source: Bank of England.
Six ways to avoid zero-return accounts
- Keep as little as possible in current accounts. These accounts are transactional and consequently tend to pay very low levels of interest. Make sure you do leave enough in there to cover bills and outgoings though, to stop you dipping into your overdraft and paying interest and fees.
- Shop around for the best rate. Trusting your high-street bank or existing provider to give you the best deal on savings won’t get you very far. Use comparison sites or cash savings hubs to find and compare the best rates available on the market.
- Don’t forget Cash ISAs. You may not be able to get quite as much in interest from an ISA as the very top savings accounts, but after tax, the protection afforded by the ISA could mean you end up better off. It depends what rate of tax you pay and how much interest you have from other sources. That’s because the personal savings allowance allows you to receive a certain level of interest tax-free every year. For basic rate taxpayers this amount is £1,000, for higher rate taxpayers it’s £500, and for additional rate taxpayers it’s £0. Interest received annually above these levels is taxable and could therefore benefit from being held in an ISA.
- Consider gilts. DIY investors have been ploughing large sums into short-dated, low coupon gilts recently. These come with a government guarantee of repayment on maturity and much more attractive rates of return now interest rates have risen. The particular appeal though is that capital gains from gilts are tax-free, so if you can identify bonds where almost all the return is coming from capital appreciation rather than an income yield, you pay less income tax. This approach is only for those who understand gilts and are willing to roll up their sleeves to find appropriate bonds.
- Consider money market funds. Another alternative is money market funds, which typically pay a higher rate of interest than the Bank of England base rate and savings accounts at banks. This makes them a good instrument to park cash and earn a steady return. Money market funds put their money in cash and cash-like investments, such as short-term loans and high-quality bonds. Money market funds can also be held in an ISA, which means no tax is liable on the income paid.
- Think about investing. Conventional financial advice is you should have three to six months of expenditure in cash, so if you’ve already got this parked in cash accounts, you should think about investing any excess for the longer term. Data from Barclays shows that over 10 years there is a 91% chance shares will outperform cash.
