Billions of pounds are languishing in savings accounts paying interest rates well-below the rate of inflation.
More than £54 billion is withering in cash ISAs paying interest rates of 2% or lower, with the majority (96%) held in instant access options, according to new research by Paragon Bank.
Some £52.4 billion of these savings balances are in easy access accounts while £1.7 billion is held in fixed-rate ISAs which pay no more than 2.0%.
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Derek Sprawling, managing director of savings at Paragon Bank, said savers can “easily” switch from a low paying instant access cash ISA into a “better paying” option to make their money “work harder”. He added: “On average, these accounts contain over £7,000 and that money could be generating much better returns by switching.”
The best cash ISA is the easy access Chip Cash ISA, currently paying 5.03%, while the best fixed-rate ISA, the Castle Trust Bank Fixed Rate e-Cash ISA, offers an interest rate of 4.49% over a one year fixed term.
While Sprawling recognised savers are protecting their money from being taxed by keeping it an ISA wrapper, he said: “Many savers overestimate the effort involved in switching a cash ISA. I’d encourage anyone receiving under 2% to consider their options.”
MoneyWeek’s guide on “how to transfer an ISA” explores the process of moving ISA savings in more detail.
Inflation means these savers are not only missing out on growing their money, but also seeing spending power erode.
The rate of inflation in the UK is currently 3.0%. The UK has seen high rates of inflation in recent years – hitting a 41-year high of 11.1% in October 2022. The Consumer Prices Index (CPI) has only fallen below 2% once since April 2021, when it dipped to 1.7% in the year to September 2024.
When interest rates are lower than the rate of inflation, the value of your savings gets chipped away in real terms because prices are growing faster than the money.
Are interest rates on variable savings accounts falling?
Variable savings rates have now dropped to their lowest level since August 2023, according to new data released by Moneyfacts.
The average easy access rate stands at just 2.84%, while the average easy access ISA is only marginally better at 3.02%.
The average notice ISA rate has also fallen, but remains higher than other easy-access options at 3.79%.
Rachel Springall, finance expert at Moneyfacts, said: “Easy access accounts remain a staple for many savers due to their flexibility, but the cuts may encourage some to consider a fixed rate deal for a guaranteed return over the coming years.”
The average one-year fixed bond rate has also fallen to 4.15%, its lowest level since May 2023. The average one-year fixed ISA rate dropped to 4.07%.
Springall said that while fixed rate bond rates are also declining, the “margins of falls are not as aggressive as seen in previous months”.
“It is imperative savers take action to consider all the various accounts available to them, maximise the interest they earn and utilise any tax-free allowances before the end of the 2024/25 tax-year,” Springall added.
Overall product choice has also fallen month-on-month to 2,146 savings deals (including ISAs).
