Loyalty to a long-time bank or building society, often passed down through generations, may seem like the easy and familiar choice. However, this can come at a cost. Some savers are not getting the best return on their money by banking with their customary provider.
Banks in the firing line
Between December 2021 and August 2023, the Bank of England raised its base rate 14 times. However, many high street banks were slow to reflect these increases in their savings account rates. In 2023, several major banks faced criticism from politicians, regulators, and consumer groups for a perceived reluctance to pass on higher rates to savers. At the same time, banks have often been quick to pass on rate rises to mortgage customers.
Many high street banks continue to offer low interest rates on savings accounts, despite the competitive rates available elsewhere. The Bank of England has cut its base rate several times since August 2024, with high street banks swiftly following suit and slashing interest rates across their savings accounts.
This all begs the question: is your bank really acting in your best interests?
Does your bank have your back?
In the modern day, banks can serve as a ‘one-stop-shop’ for financial needs, with mortgage services, easy-access savings accounts and investment products all available with the same provider. Many savers therefore opt for the comfort blanket of investing with their bank, in addition to holding cash in a savings account.
However, this can back-fire. Ready-made investment portfolios that some banks offer often underperform global benchmarks. In some cases, banks’ investment portfolios may have restrictions, or preferential use of internally owned funds, presenting a conflict of interest.
Tip: Certain portfolio fees can also be high for a limited service/product – ie. no ongoing financial planning advice – depending on the amount invested, and total costs and charges.
Don’t let your cash ‘rot away’
The other important factor to remember about cash savings is that your purchasing power is eroded by the invisible loss of inflation. Money held in savings accounts over recent years has been decimated, as inflation surged. Inflation has now largely been tamed, but is still well above the Bank of England’s long-term 2% target rate.
Tip: If you’re continuing to hold cash in low-interest bank accounts you are, in all likelihood, making a real terms loss. The illustration below highlights the erosive effect that inflation has on your spending power over time. £100,000 of cash savings now would be worth just £63,500 in real terms after 30 years – less than half the nominal value of £135,000 – if inflation ran at 2.5% over the period (despite annual interest of 1%).
Investing vs. cash
Cash plays an important role, and having a rainy-day fund for emergencies is essential. However, it’s best suited for short-term needs. Leaving cash to ‘rot’ in low-interest savings accounts, where it is at the mercy of inflation, is not a productive use of your money.
Tip: For longer-term wealth building, your money will work harder if it’s invested in assets like shares and bonds, rather than sitting in cash. Investing requires a long-term mindset – at least five years, but ideally 10 or more – and the ability to weather ups and downs in investment values.
To learn more about investing for the future call 03300 564 446, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
