Base rate falls to 4.5% - bad news but also an opportunity?

As expected, the recent news from the Bank of England has delivered a blow to savers, as the base rate was cut to 4.50%, from 4.75%. 

Following this news we would expect to see cuts to both the savings accounts currently available, but also existing variable rate savings products.

However, this could also serve as a timely opportunity for savers—a reminder to review and optimise their savings before rates decline further.

Analysis by Yorkshire Building Society and data consultancy CACI found that nearly £400 billion is languishing in savings and current accounts earning 1% or less! Savers who are willing to shop around could easily boost returns and secure rates of over 4%, even if they need to retain easy access to their money.

On a balance of £10,000 that means earning in excess of £400 instead of nothing! It’s effectively free money.

For those who can afford to lock up some of their funds, there are still highly competitive inflation-beating fixed-term savings accounts available, which could protect against further rate cuts.

While inflation currently stands a little above the Bank of England’s 2% target, it’s expected to rise slightly further before settling back to around 2% by the end of the year. The good news is that many top savings rates are paying well above inflation at its current level — even after tax — giving savers a chance to protect and grow their money in real terms.

So, locking some cash away into a longer-term fixed account could be a prudent strategy.

If inflation falls back to 2% as projected, savers will be pleased to have locked into rates that comfortably outpace the rising cost of living, for longer. But it’s crucial to ensure you won’t need access to these funds before the fixed term bond matures, as early withdrawals aren’t allowed.

And don’t forget fixed term cash ISAs – which do allow early access, although with a hefty penalty. With tax free interest, the returns are likely to be better than from the bond equivalents.

Although the headline rates on bonds look as though they will provide more, they may not if you pay tax on your savings. For example, if you were to deduct basic rate tax from the top 1-year bond paying 4.66%, the net rate is 3.73%. In the meantime, the top 1-year fixed rate cash ISA is paying 4.45% tax free. So, on £20,000 you would take home £746 from the bond, but £890 from the ISA!  

That’s why for many the cash ISA allowance is not to be disregarded.

The bottom line is that with rates still attractive, now is the perfect time for savers to take control, avoid dormant cash traps, and maximise returns and tax-efficiency while they can.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate tax advice. 

The accounts and rates mentioned in this article are accurate and correct as at the time of writing.