SAVERS have been issued a warning over “zombie” bank accounts costing them money ahead of a big interest rate update tomorrow.
Around £280billion is sitting in accounts paying zero interest, the latest data from the Bank of England (BoE) reveals.
The amount of cash sitting in these types of accounts has also risen by £51billion in the last year.
It comes as the BoE is widely expected to lower the base rate tomorrow from 4.5% to 4.25%.
The base rate influences what happens to savings rates, meaning if it falls tomorrow, interest rates on savings accounts will likely follow soon after.
Economists are predicting the base rate to be cut by up to 1% over the next six months too.
So, it pays to do an audit now and make sure money sitting earning no interest is moved to an account paying a higher rate.
Laura Suter, director of personal finance at AJ Bell, said: “If you want one figure to sum up the apathy of the UK’s savers, it’s the fact that £280billion is sitting in these so-called zombie accounts earning absolutely no interest, at a time when interest rates are north of 5% for some savings accounts.
“The nation is missing out on millions of pounds of potential returns on their money.”
Not only is the £280billion in no interest accounts meaning households aren’t earning money on their cash, but effectively losing it in real-terms due to the rising cost of living, known as inflation.
Inflation dipped to 2.6% in March, from 2.8% in February, according to the latest figures from the Office for National Statistics (ONS).
This is down from a 41-year high of 11.1% in October 2022, but prices are still rising, just at a slower pace.
Laura added: “Even if the £230billion sitting in zero-paying accounts a year ago had earned a rather pedestrian 3% return on the cash in the past 12 months, it would have made the nation £6.9 billion richer.
“Not only is the money not earning any interest, it’s also being eaten away by inflation.
“While inflation has dropped from its double-digit highs, it is still chipping away at the spending power of your money each year.
“Keeping the money in your current account or an old savings account earning nothing is as good as stuffing it under your mattress – although admittedly the latter is probably a more comfortable option for sleeping at night.”
Time to ditch zombie savings accounts
You might want to keep money in a current account paying no interest because you need to use it for daily expenses.
But, if you’ve got cash stashed away in a savings account paying little to no interest, it pays to switch to a different one.
The latest data from Moneyfactscompare shows some savings accounts are paying as little as 0.49% interest on minimum £1 deposits.
However, there are a range of bank accounts offering rates over 5%, including across easy access savings accounts and Cash ISAs.
According to Moneyfactscompare, Chip’s Easy Access Saver is offering the highest rate across easy access savings accounts, then Atom Bank’s Instant Saver Reward – with rates of 4.76% and 4.75%, respectively.
Savers can also get rates of up to 5.71% on easy access Cash ISAs, according to the price comparison website.
Make sure you’re picking the best savings account for your needs though.
ISAs are a great way to save money as any interest earned is tax-free, which is not the case for easy access savings accounts.
A lot of savings accounts set a limit on the amount of withdrawals you can make per year before incurring a fee too.
Meanwhile, regular savings accounts will often offer the best interest rates, but the amount you can put in each month will usually be capped at between £200 to £500.
It’s worth shopping around before signing up to a savings account via price comparison websites like moneyfactscompare.co.uk or moneysavingexpert.com.
Three ways to avoid zero-return accounts
AJ Bell has revealed three ways you can swerve zero-return accounts:
- Keep as little as possible in current accounts. These accounts are transactional and consequently tend to pay very low levels of interest. Make sure you do leave enough in there to cover bills and outgoings though, to stop you dipping into your overdraft and paying interest and fees.
- Shop around for the best rate. Trusting your high-street bank or existing provider to give you the best deal on savings won’t get you very far. Use comparison sites or cash savings hubs to find and compare the best rates available on the market.
- Don’t forget Cash ISAs. You may not be able to get quite as much in interest from an ISA as the very top savings accounts, but after tax, the protection afforded by the ISA could mean you end up better off. It depends what rate of tax you pay and how much interest you have from other sources. That’s because the personal savings allowance allows you to receive a certain level of interest tax-free every year. For basic rate taxpayers this amount is £1,000, for higher rate taxpayers it’s £500, and for additional rate taxpayers it’s £0. Interest received annually above these levels is taxable and could therefore benefit from being held in an ISA.
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