What rate rises mean for your sustainable savings

Written by Lori Campbell on 22nd Jun 2023

The hike in the base interest rate to five per cent means eye-watering mortgage rises for homeowners – but a small silver lining is increased savings rates.

To make the most of this positive, you’ll have to take some action. Here are six steps to making your cash work hard for your future (and the planet’s – because what’s the point in one without the other?).


1. Shop around for the best deal now

If you have some savings, there is a positive among all the gloom of rate rises. Easy access savings rates have surpassed four per cent for the first time since 2009 and some fixed-rate savings and bonds have gone beyond 5.30 per cent. If you have money festering in an account with rates as low as one per cent or less, act now and shop around for a better deal!

Not all banks and building societies will be passing on the full rate increases to their customers, so it’s up to you to make the switch.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, said: “It’s worth keeping in mind that the extent of the interest rate increase and the competitiveness of savings rates may vary. Different savings providers offer different rates, so shopping around for the best deal remains the name of the game.”

Many of the UK’s big high street banks have taken advantage of recent rate rises to improve their margins, rather than passing them on to customers. Research by Atom Bank shows that in the first three months of this year, Barclays, HSBC, Lloyds, NatWest and Santander, posted combined pre-tax profits of just over £5 billion – that’s a massive 43 per cent increase on the equivalent period last year. These banks also have appalling records on fossil fuel investment.

See our top ethical savings accounts for providers that will treat you and the planet fairly.


2. Look at longer fixed rate deals

You can currently get a considerably higher rate if you’re willing to fix for three years, so consider this timeframe if you can afford to lock your money away (remember you won’t be able to access it until your term is up).

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, said: “You currently get more for fixing for three years than for longer. This is reflective of the mixed economic outlook, and the expectation that rates will rise for the short term but come down again in the future.

“It may be tempting to fix for a shorter period in order to snag a better rate but think carefully when you actually need this money. If you don’t want to spend it for at least five years, you might find savings rates are much lower when we get 12 months down the line, so fixing for one year may leave you earning less for the next four. It makes sense to start with the rate you want to fix for, rather than being swayed by what’s happening to rates right now.”

Check out our top-paying ethical fixed rate bonds here.


3. Avoid a ‘wait and see’ approach

It may feel tempting to wait and see before fixing your savings rate, in case rates continue to rise. This may well happen in the next few days as providers catch up with the base rate rise. However, the financial market works ahead of rises by predicting them. If it has over-estimated how many we need to get inflation under control, then savings rates could come back down. This means it’s worth considering locking in higher rates sooner rather than later.


4. Consider investing

Bear in mind that soaring inflation – currently at 8.7 per cent – far outstrips even the best savings rates on offer so your cash will be losing value over time.

Alice Haine, Personal Finance Analyst at Bestinvest, said: “Don’t forget that the returns on cash savings accounts are still deeply negative in real terms as persistently high inflation will eat away at even the most competitive savings rates.”

Therefore, if you can afford to put money away for five years or more, you should consider investing as it has potential for inflation-beating returns over the long term. If you’d like your investments to make a positive impact on the world, see our top sustainable investing platforms. Remember that when you invest, your capital is at risk.

5. Beware of tax implications

Taking advantage of higher savings rates may sound better than investing in the financial markets, but be careful about how much you deposit in a regular savings account as there can be big tax implications.

Alice said: “The combination of higher interest rates and frozen or lower thresholds on income tax means some basic-rate taxpayers risk breaching their Personal Savings Allowance, which allows them to receive up to £1,000 of interest tax-free on their savings.

“Those paying the higher 40 per cent tax rate are in even more danger as the allowance drops to £500, while additional tax rate payers – those subject to the 45 per cent income tax band – receive no concession at all.” It might be worth getting advice from an independent financial adviser – check out the best ethical options here, including ‘Good Egg’ firms EQ Investors, BlueSphere Wealth and Path Financial 

6. Get a good deal for the planet, too

As a Good With Money reader, interest rates won’t be the ONLY important factor you consider when choosing a cash savings account. Look for a provider that helps to protect not only your future, but the planet’s too.

Ethical banks and building societies will not invest in fossil fuels and other destructive industries like tobacco and weapons, and some – like ‘Good Egg’ firm Triodos – go so far as to only lend your money to businesses and projects that are making a positive impact on the planet and society. See our top-paying sustainable savings accounts here.

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