Is it worth chasing the best savings rate or should I just pick and stick?
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Ask the experts. Laura Suter is on hand to answer your personal finance questions. If you’d like a question considered for a future edition, send it in now.
I know that lots of people will move their savings around each time a new top deal lands, to get the most from their savings, while other people leave it sitting in their current account or an old savings account probably earning nothing. I’m somewhere in between, where I move my cash savings around every few years but should I be doing it more often and is it really worth switching every time a higher interest rate is available?
AH, Norfolk
Laura Suter, AJ Bell Director of Personal Finance, says:
This is a question that crops up every time savings rates move, and in recent years they have moved a lot. Banks are constantly tweaking their offers and often a new account is hitting the top of the interest rate tables, which means it can feel like a full-time job trying to keep up.
Like you say, the temptation is either to chase every extra fraction of a percent, or to give up entirely and park your cash somewhere for years. The right answer, as ever, probably sits somewhere in the middle.
To work out whether chasing the best rate is worth it, you need to understand how much difference those headline rates actually make to your money.
What does a higher rate really get you?
Let us start with a simple example. Suppose you have £20,000 in an easy-access savings account. Bank A pays 4.5% and Bank B pays 4.8%. On the face of it, Bank B looks clearly better.
Over a year, £20,000 at 4.5% would earn £900 in interest. At 4.8%, you would earn £960. That means the difference is £60 over the 12 months.
If switching takes you half an hour and a bit of form filling, you might decide £60 is worth it. But if the rate gap is smaller, the benefit quickly becomes less compelling. For example, a difference between 4.7% and 4.8% on £20,000 is just £20 a year. That is £1.67 a month. At that point, many people would reasonably decide their time and hassle are worth more than that.
The sums matter even more if you have a smaller pot. Let’s look at £5,000 of cash savings, the difference between 4.0% and 4.8% is just £15 a year, which for many wouldn’t be worth it. And in the example of a rate difference between 4.7% and 4.8% it’s just £5 a year. You would struggle to notice it.
When chasing rates can pay off
There are situations where shopping around absolutely makes sense. The first is when your existing rate has fallen well behind the market. Many easy-access accounts are ‘best buy’ accounts when they launch, then they quietly slide down the tables. If you are earning 2% when you could easily get 4.5%, that is a meaningful gap. On £20,000, 2% interest gives you £400 a year. At 4.5%, you get £900. That £500 difference will be worth some effort switching for lots of people.
The second situation is when you are dealing with a large balance. Someone with £100,000 in cash will see five times the impact of the examples above. A 0.3 percentage point difference on £100,000 is £300 a year. That’s worth paying attention to, even if it does feel like hassle switching or you’re not normally a rate chaser.
The third case is when you are locking money away. With fixed-rate savings, you are committing for one, two or even five years. Getting the rate wrong at the outset can be costly because you cannot easily fix it later or get out of that account.
For example, £50,000 fixed for two years at 4% would earn roughly £4,000 in interest over the term. At 4.5%, you would earn about £4,500. That £500 difference is baked in for the full two years, so a bit of rate-chasing upfront is sensible.
The hidden costs of constant switching
But, there are downsides to relentlessly chasing the top of the tables, otherwise everyone would be doing it. One is the sheer admin. Multiple accounts mean more passwords, more statements and more scope to lose track of where your money is.
There is also the issue of tax. Many people forget that interest above your Personal Savings Allowance is taxable. Basic-rate taxpayers can earn £1,000 of interest tax free, while higher-rate taxpayers get a £500 tax free limit, and additional-rate taxpayers nothing at all.
If you are already over your allowance, the extra interest from a slightly better rate may be partly lost to tax. For a higher-rate taxpayer paying 40% tax, with the original example cited above, that £60 of extra interest becomes £36 after tax. Suddenly the incentive to chase looks weaker.
A good enough approach
For most people, the sensible compromise is to aim for a competitive rate, but not necessarily always chasing the very best. Being within 0.2 or 0.3 percentage points of the top rate is usually fine, particularly for easy-access cash.
The key is to avoid complacency. Checking your savings rate once or twice a year is enough to make sure you are not being left behind. If your account slips badly down the rankings, then it is time to move. If it is still broadly competitive, you could decide to safely ignore the noise.
It can also help to simplify. Some savers keep one easy-access account for flexibility and one or two fixed-rate accounts for longer-term money. That limits admin while still ensuring most of the cash is working reasonably hard. Another option is using a cash savings hub, where you can manage several different accounts in one place – that helps to take away some of the admin burden of remembering a host of different logins and passwords.
Using tax efficient accounts like Cash ISAs is another way to boost your returns. If you’re near or over your personal savings allowance, a slightly lower ISA rate can still leave you better off after tax than a higher rate but taxable account.
Laura Suter: Director of Personal Finance
Laura Suter is AJ Bell's Director of Personal Finance. She joined the company in 2018 and is the go-to spokesperson on all things personal finance - from cash savings rates to saving for children and...
