Common banking mistake costing UK savers
Many people in the UK have a current account and a savings account with the same bank. While this can feel convenient, it is a common banking habit that could be costing you a significant amount of interest over time. This happens because the interest rates offered on easy-access savings accounts at major high street banks are often much lower than the best rates available elsewhere in the market.
This guide explains why this loyalty can be expensive, how to check if you are affected, and the practical steps you can take to ensure your savings are working as hard as possible for you.
Why sticking with your main bank can cost you
The core of the issue is a lack of competition for your savings. When you hold both your day-to-day current account and your savings with one provider, there is little incentive for that bank to offer you a competitive savings rate. They know that moving your savings is an extra step you might not take, so they can often pay a lower rate, sometimes called a “loyalty penalty”.
Meanwhile, other banks and building societies, particularly those operating online, are actively competing to attract new savers. They frequently offer market-leading rates on easy-access and fixed-term accounts to draw in deposits. The difference between the rate your main bank pays and the best available rate can be substantial, often more than one or two percentage points.
How to check if you’re losing out
Checking whether you could be earning more is a straightforward process. First, log into your banking app or online portal and find the interest rate for your savings account. It will be shown as an Annual Equivalent Rate (AER). Next, compare this rate against the best buy tables from independent financial comparison websites. Look for “easy-access savings” accounts to make a fair comparison with your existing account type.
For example, if you have £10,000 in savings, a difference of just 1% in the interest rate means a loss of £100 in interest over one year, before tax. Over several years, this compound effect can add up to a considerable sum.
What to consider before moving your savings
Before switching to a higher-paying account, there are a few key factors to consider to ensure it’s the right move for you.
Financial Services Compensation Scheme (FSCS) protection
Your savings are protected up to £85,000 per person, per banking licence by the FSCS. This protection applies whether you save with a high street bank or a smaller online provider, provided they are authorised by the Financial Conduct Authority (FCA). Always check the provider is FSCS-protected before opening an account.
Access and convenience
Consider how you access your money. Some of the best-paying easy-access accounts are online-only or app-based, which may suit you perfectly. Others might have restrictions, like a limited number of penalty-free withdrawals per year. Ensure the account’s access rules match your needs.
The tax treatment of your interest
Remember that interest earned on standard savings accounts is subject to tax. Each tax year, you have a Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers). If your savings are substantial, moving to a higher rate could push you over this allowance, meaning you may owe tax. Using a Cash ISA, where interest is always tax-free, can be a smart way to shield your interest from tax, though ISA rates can sometimes be slightly lower than the best non-ISA rates.
Taking action: a simple step-by-step approach
If you find you are earning a poor rate, you don’t necessarily have to move your current account. You can simply open a new, separate savings account with a different provider. The process is usually quick and can be done online.
- Research: Use comparison sites to find a top-paying easy-access account from an FSCS-protected provider.
- Apply: Complete the online application, which will involve identity checks.
- Transfer: Once the account is open, you can set up a transfer from your old savings account. You can often do this from within the new account’s online banking by linking your old account.
- Manage: Consider setting up a standing order to move money from your current account to your new, higher-paying savings account regularly.
By periodically reviewing your savings rate—perhaps once or twice a year—you can ensure your money is never languishing in an uncompetitive account. It’s a simple piece of financial housekeeping that can make a real difference to your savings growth over the long term.
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