Need to know
Savers are seeing the returns on their cash fall dramatically with further rate drops possible in a challenging economic climate as Trump threatens tariffs on the UK over Greenland
The average rate on cash savings has dropped to its lowest level in three years, with experts saying it’s worth considering investing as an alternative if your money isn’t needed in the short term (Image: Getty Images)
UK savings rates are under pressure, with the Moneyfacts average falling to 3.35% in January. While declining returns squeeze savers, experts say this may highlight the limitations of cash, potentially encouraging a shift towards long-term investments rather than traditional savings accounts.
- The Moneyfacts Average Savings Rate has dropped from 3.64% to 3.35%, marking its lowest level since May 2023. This decline reflects a broader trend over the past year.
- Recent cuts to the base rate have significantly impacted the market, causing all average savings rates to fall simultaneously for the first time in six months. Despite this, roughly 40% of accounts still pay above the base rate, the highest level on record.
- Easy-access accounts and fixed-rate ISAs have seen notable reductions, and analysts warn that there is still significant headroom for these rates to fall even further in the coming months. The average one-year fixed ISA rate fell to 3.79%, its lowest level since April 2023 (3.68%) and the longer-term fixed ISA rate fell to 3.75%, last as low in March 2023 (3.72%).
- Meanwhile, the average easy-access rate fell for the first time since October to 2.48%, its lowest since July 2023 (2.41%), and the average one-year fixed rate fell to 3.85%, its biggest fall since June and its lowest since April 2023 (3.81%). The longer-term average fixed rate fell for a second month running to 3.80%, its lowest since November 2022 (3.77%).
- Financial advisers suggest that falling rates create a “moment of friction” that highlights the trade-off between cash safety and investment growth. This awareness may nudge savers to reconsider whether holding large amounts of cash is a viable long-term strategy.
- Experts say cash is best suited for short-term emergencies rather than delivering the growth needed to beat inflation. Relying solely on deposits risks the quiet erosion of spending power as the cost of living remains high.
- While current trends point downwards, geopolitical tensions and potential tariffs could cause inflation to rise again and reverse the trajectory of interest rates. Savers are encouraged to draw up a balanced financial plan that accounts for both market volatility and personal needs.
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