Sometimes, doing nothing costs you dearly. The latest data from the Bank of England reveals that savers in the UK hold £280bn in savings accounts that don’t currently pay a penny of interest. That’s a record sum – last year, the Bank put this figure at £230bn.
Everyone in this situation is getting poorer by the day. It’s not just that they’re missing out on valuable savings interest, though if all that cash had been held in savings accounts paying an average of 3% Gross/AER* over the past year, the interest payments would have come to £6.9bn. It’s also that inflation is eroding the real value of their money; a fixed cash sum has less purchasing power today than a year ago because prices have risen since then.
Businesses and charities at risk
This isn’t just a problem for individual savers. Businesses and charities are also vulnerable to inaction on savings deposits; many aren’t getting a decent return on their spare cash.
Indeed, United Trust Bank research published last year found that the UK’s small and medium-sized enterprises (SMEs) were missing out on around £2.3bn of interest payments each year by leaving excess credit balances in current accounts and instant access savings accounts that paid uncompetitive interest rates. To put that sum into perspective, the bank calculated that it would be enough to pay for 58,000 new members of staff.
It’s difficult to find equivalent up-to-date figures for charities, but savings experts have in the past estimated that they too are missing out on hundreds of millions of pounds of interest each year. All that money could be put to good use in the important work that charities do.
Why do so many organisations miss out? In practice, there are lots of reasons. In some cases, businesses and charities don’t have processes in place for maximising returns on savings; it may not even be clear who is responsible for this task. In others, organisations are trying to manage their money but are struggling with the challenges of doing so; they may be nervous about giving up access to cash or unclear about where to find the best deals.
Managing excess cash can also be difficult because the market environment is a dynamic one. Interest rates change all the time – sometimes in line with changes to Bank of England base rates, but also as savings providers compete with one another, launching new products or tweaking rates on existing accounts.
This year, for example, the Bank has already reduced base rates twice and is widely expected to make further reductions in the second half of the year. Individual providers of savings accounts will respond in their own ways and at different times to these rate changes.
Overcoming savings inaction
How, then, to confront these problems? Well, the first point to make is that it’s important not to let perfect become the enemy of good. Even if your organisation doesn’t always earn the absolute best interest rates on its money, it will still be substantially better off by taking action than by doing nothing.
In practice, that means developing a savings strategy. In particular, it makes sense to segment your cash. Identify how much money you need to hold in accounts that can be accessed immediately; funds you don’t need to have on hand straight away can then be allocated to accounts that pay higher rates of interest but require notice of withdrawals. You may also be able to get better rates by investing some of this longer-term cash in accounts that run for a set duration – fixed-rate savings bonds, for example.
Once you’ve divided your organisation’s funds up in this way, you can shop around for the best deals. The savings account provider offering the best rates on easy access accounts may not be the right home for cash you’re locking up for a couple of years, say. And don’t assume your current account provider’s savings rates are competitive; they may be, but you need to check.
Keep shopping around
Having done the hard work, be prepared to review your organisation’s savings strategy regularly – every six months, say. Is the way that you’ve divided up your funds still appropriate to the organisation’s needs and plans? Are there now better savings products available – and if so, can you move money into them without incurring early withdrawal penalties or other costs?
Don’t underestimate how much impact you can have with such a strategy – even in today’s relatively low-interest rate environment, the deals on offer vary significantly.
For example, United Trust Bank’s Charity and Business Easy Access accounts, which both require a minimum balance of £5,000, currently pay 3.6% Gross/AER* per year; elsewhere, similar accounts offer rates as low as 1.1% Gross/AER* per year. And it’s a similar story on longer-term products. United Trust Bank’s fixed-term bonds for both business and charities pay rates of up to 4.25% Gross/AER* per year. Some accounts pay less than half that.
The bottom line? Charities and businesses have everything to gain by looking again at their savings strategies. It’s vital to get spare cash working as hard as possible.
*AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. Gross is the interest rate without the deduction of income tax. Interest is paid gross into your account.
David Prosser is an award-winning personal finance journalist. Although this article may contain helpful information and tips, this is his view of the outlook for interest rates and not financial advice. If you are unsure about what is best for your specific requirements you may wish to seek advice from an independent financial adviser.