Savers are facing mounting “pressure” amid fluctuating interest rates and existing tax rules remaining unchanged for the foreseeable future, according to new analysis from experts at Moneyfactscompare.
The findings come after Labour’s first Autumn Statement in October 2024 failed to increase the Personal Savings Allowance (PSA), leaving savers to navigate challenging market conditions.
“Savers who are expecting their two-year fixed bond to mature this year will see that the top returns are not too dissimilar today, which could sway investors to lock in for a shorter one-year term if they are concerned about inflationary pressures,” said Caitlyn Eastell, spokesperson at Moneyfactscompare
She warned that consumers should be mindful of their initial investment amounts to avoid potentially breaching the PSA. The latest data shows the top one-year fixed bond rate has fallen to 4.79 per cent gross, whilst the top five-year fixed bond sits at 4.64 per cent.
This represents a narrowing gap between the two respective interest rates rates, with just 0.15 per cent now separating them, compared to 0.16 per cent in the previous month.
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Savers are worried about fluctuating interest rates
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The difference marks a significant shift from January 2024, when the top one-year bond paid 5.50 per cent and the five-year bond offered 5.22 per cent, creating a wider gap of 0.28 per cent.
“Although shorter-term fixed bonds currently pay higher rates than their longer-term counterparts, there are expectations for base rate cuts this year,” noted Eastell.
The market shift becomes even more apparent when comparing current rates to those from July 2024, when the top one-year fixed bond stood at 5.25 per cent. During that period, the five-year fixed bond rate was 4.95 per cent, creating a gap of 0.30 per cent between the two options.
Looking at average rates across the market, the one-year fixed bond currently stands at 4.19 per cent gross, compared to 3.86 per cent for five-year bonds, Moneyfacts reports.
This creates a difference of 0.33 per cent between average one and five-year rates, slightly down from the 0.36 per cent gap observed last month. The contrast becomes starker when examining figures from July 2024, when the gap between average rates was significantly wider at 0.66 per cent.
During that period, average one-year bonds paid 4.64 per cent, while five-year bonds offered 3.98 per cent. A year ago, the disparity was even more pronounced, with average one-year bonds paying 4.87 per cent compared to 4.20 per cent for five-year terms, creating a gap of 0.67 per cent.
Eastell emphasised that potential Bank of England base rate cuts this year could impact savings rates, particularly affecting variable rates initially. These anticipated changes may also influence how providers price their fixed rate products.
“Reductions to the Bank of England base rate typically impact variable rates in the first instance but may also influence providers pricing for fixed rate products. Therefore, savers could feel its wiser to fix for longer,” she explained.
“Investors may wish to seek independent professional advice before locking away their cash and carefully consider the terms and conditions of a fixed rate deal,” Eastell added.
As it stands, the Bank of England’s Monetary Policy Committee (MPC) has voted to hold the base rate at 4.75 per cent, a slight drop from the high of 5.25 per cent seen last year.
Analysts are pricing in at least two cuts to interest cuts from the central bank later this year which could impact offers from banks and building societies in the months ahead.
The Bank of England’s MPC is next set to meet to discuss the future of the UK base rate on February 6, 2025.
