Q: Now that interest rates are rising should I be moving my money into cash accounts? I have the majority of my savings in the stock market in Isas, which only seem to be losing money at the moment, and am reluctant to put this year’s Isa allowance in as well. What should I do?
A: You are right that interest rates are on the rise, but unfortunately so is inflation. The latest figures put inflation in May at 9.1 per cent, but the best savings accounts are paying only a little over three per cent, so your money is still falling in real terms. However, as you point out, the value of shares has fallen and the stock market is currently very volatile. But over the longer term, shares have historically provided a much better hedge against inflation than cash savings.
According to online data specialists moneyfacts.co.uk, in June 2020 there were 440 savings accounts which beat inflation, then at 0.5 per cent. Today no account can do that.
Rachel Springer, financial expert as moneyfacts.co.uk said: “Inflation is eating its way into the real spending power of consumers’ cash. It has now been over a year since savers were able to beat inflation.”
All that said, you do need to have some cash savings. Experts recommend three to six months’ worth in a savings account to cover emergencies and provide a cushion if things go wrong. It is worth spreading this money in a mixture of easy access and notice accounts to get the best rates. The more you have to save, the better the rate will typically be.
At the time of publication, the top easy-access account, Aldermore’s Double Access Account, was paying 1.4 per cent and is opened and run online with a minimum deposit of £1,000. For smaller amounts RCI Bank Freedom Savings Account is paying 1.32 per cent on deposits of £100 or more and is again run online. If you are happy to tie up your money for longer, Paragon Bank, again online, is paying 1.61 per cent but you must give 120 days’ notice before you can get your money without loss of interest. You’ll need an initial deposit of £500.
Investec Bank Raisin UK has a 32 day notice account paying 1.51 per cent if you need quicker access to your money, but again it is available only on deposits of more than £1,000. It is opened online but can also be managed by phone and post.
Given that rates are not beating inflation, a cash Isa is not likely to offer the best option for your allowance this year. But since I don’t know your financial circumstances it would be best to talk to a financial adviser to get specific advice. If you do want to follow this route, the best variable rate cash Isa is currently Leeds Building Society’s Limited Issue 30 Monthly Fixed Cash Isa, paying a tax free 2.75 per cent until February 2, 2025 on £1,000 plus. It is opened and managed by post, online or in branches.
