The race for cash savings is a new experience for many UK customers

They used to say that you were more likely to get divorced than to break your bank. The high street institutions we stick with for most of our adult lives are often the ones that offered us a free rail card in college.

But this should no longer buy our loyalty, as the amount of interest they pay is likely to be paltry. Despite the Bank of England’s 11 rate hikes in a row, some £256 billion of cash in savings accounts is earning zero or very little interest, according to a study published this week. On Thursday, the UK financial regulator warned parliamentarians against “burdensome intervention” if banks continue to profit from customer inertia.

However, as more of us rediscover the long-forgotten habit of saving, we are voting with our feet. Record numbers of consumers switched banks in the last quarter of 2022, according to the latest data of the Current Account Exchange Service. The annual total of 1 million changers was 20 percent higher than the previous year; figures for the quarter to be released next week are likely to show further progress.

Much of the motivation behind this change for bank customers is the ability to now earn higher interest on their savings. In the UK, banks like HSBC, NatWest and RBS are also offering £200 cash bonuses to move your money around, something that is proving extremely popular during the cost of living crisis.

This week I spoke to a member of the bank who suggested that the high level of abandonment of “serial changers” is beginning to backfire on banks. “Switchers are money-savvy, but they’re not the most profitable customers,” he said, alluding to the high cost of bringing them on board, only to lose them to a rival a year later.

However, costs could skyrocket if regulators insist banks raise interest rates on existing customers’ savings accounts, many of which are still below 1 percent. Of course, savings rates aren’t the only reason to break up (or reconcile) with a bank. Customer service is also important, and this costs money. Therefore, it is important that consumers have a choice.

Meeting our different banking needs increasingly means having more than one bank account. Digital banks like Monzo and Starling have lured millions of customers with free foreign budgeting and spending tools. The functionality of setting up separate savings “drawers” ​​and “spaces” is valuable, even if the interest rates offered are small.

In any case, younger, digitally savvy bank customers haven’t seen rates like these in their entire working lives. If they want to get a higher interest rate, they can do it on their phones with a few clicks. The speed and ease with which the digital generation can transfer money is a worrying new problem for banks.

While no account pays anywhere near the high rate of inflation, it’s never been easier to make sure your emergency fund and short-term savings are at least going some way. New bank entrant JPMorgan Chase UK has attracted large volumes of customers by offering 3.1 percent interest on savings of up to half a million pounds and 1 percent cashback on purchases. One goal is to get wealthy clients to open an investment account with Nutmeg, the digital wealth manager it acquired in 2021. Some 30,000 clients have signed up since Nutmeg launched on the Chase app in February.

However, keeping a large part of your long-term savings in cash can be a costly mistake. Although investors remain nervous about the markets, the novelty of earning interest on cash savings could wear off with future tax bills. Since April, Britons with an annual income of more than £125,000 have been an additional rate payer and must pay 45 percent tax on interest on savings. Isas tax havens are the obvious answer. The main cash Isas pay a little more than 4 percent, but a transfer jam it has emerged as savers try to access the best rates.

You can also have up to £50,000 in Premium Bonuses and although no interest is paid, the prizes are tax free. The “award rate” is currently equivalent to 3.3 percent and could well increase again as the chancellor increased funding goal for National Savings & Investments, the state savings bank, in last month’s Budget.

Another rapidly growing trend is to maintain money market funds within your shares and participations Isa. They offer a yield comparable to the prevailing base rate and typically invest in short-term government bonds. They are not risk-free, but as a short-term strategy, many investors are adjusting their portfolio balances as they ponder their next move.

For investors and savers, cash is a flexible friend in uncertain times. With rates seeming to get even higher, wherever you have yours, make it your mission to make it work as hard as you do.

The writer is the consumer editor of FT and the author of ‘What they don’t teach you about money‘. instagram @Claerb

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