In a falling interest rate environment, how should consumers act? Image credit shutterstock

The Bank of England’s decision to cut interest rates from 5.25% to 5%, in tandem with inflation settling at a rate close to the 2% target, leaves Britons’ savers with a decision. Should they move their savings to secure more generous returns? With interest rates anticipated to fall further in the next 18 months, a move that would put further strain on people’s savings, it is vital that people consider all the options when it comes to gaining the best returns on their well-earned money.

This change in policy means the favourable savings environment of past years, which saw interest rates outstrip inflation, may not last much longer. Savers’ opportunity to grow their savings in real terms is closing.

The recent change in economic outlook has already seen banks adjusting their savings rates, a move that is expected to continue. Savers, therefore, need to decide if they are best served by staying put or looking for better returns elsewhere. To do so, it’s important for savers to research and educate themselves on the different options available to them.

The connection between interest rates and savings rates

Interest rates and savings rates are intrinsically linked, and getting to grips with this relationship will help in understanding why returns are diminishing. If the Bank of England reduces the base rate, as it did at its most recent meeting, banks will react by dropping the rates they offer on their savings products.

In recent years, savers have enjoyed watching their savings earn considerable returns thanks to higher interest rates and meaningful wage growth. However, the lowering of interest rates might prompt concern for many.

With rates expected to fall further, savers have one final chance to maximise their returns before the savings market becomes less favourable. So, what should Britons consider before transferring their savings?

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What savers need to understand

As savers decide whether to move their savings, it’s crucial they assess several key factors. Making ill-informed or hasty decisions can end up having a detrimental effect on savers’ finances. Here is what they must keep in mind:

  • Exit fees and penalties: Before moving money to a new product, it’s important to find out whether the current account your money is in has any exit fees or penalties. For example, many fixed-term savings accounts may charge for early withdrawal. So, before deciding to move their money, savers must determine whether or not the penalties incurred don’t add up to more than the interest that would be made in the new account.
  • Selecting the right product: Choosing a savings option that fits in with people’s financial ambitions is another important consideration. Fixed-term savings products often have higher interest rates than easy-access accounts. However, it must be remembered that any funds deposited into a fixed-term account can’t be withdrawn for a fixed period, sometimes up to five years.

Over the last few years, with rates staying high or even increasing to tackle rising inflation, fixed-term products couldn’t match the opportunity for higher returns offered by flexible accounts. Now that the rate has dropped and is set to fall further, securing a savings account that remains at a favourable rate for a lasting period becomes a more enticing possibility.

  • Browsing the market: Don’t limit your search to the traditional high street banks. Challenger banks and online-only banks often offer lower rates as they can save on overheads and can be more innovative than their long-standing competitors.

However, savers must remember to check that any bank they choose is covered by the Financial Services Compensation Scheme (FSCS), meaning their money is protected up to £85,000 should anything happen in the bank’s future.

Other factors that should be a priority for savers are the reputation of the chosen bank, its customer service, and the accessibility and ease of managing their accounts.

By ensuring they research all of these features, savers can select a product that perfectly aligns with their needs and offers competitive returns, all without compromising on security.

Making the correct choice

As the interest rate outlook continues to change, savers across the UK face challenging decisions about the best location for their money. With rates predicted to fall, it’s wise to research the costs and benefits involved with moving savings thoroughly.

Choosing the right product, paying attention to exit fees, and looking beyond the traditional high-street banks can make a significant impact. By remaining in tune with the market and being diligent in their search, Britons can get the best return on their savings and set themselves up for the future.

Sam Compton is Director of Operations at Chetwood Bank