2024 was a challenging year for savers. After years of receiving such low interest that it seemed stuffing cash in a mattress was almost as rewarding, savers were finally getting used to the idea that savings could be worthwhile again. Cash, it seemed could again offer a decent return, instead of steadily slipping behind in the race against inflation.
And then the Bank of England started to cut the Base rate, and banks and building societies started to pull all those rewarding high return accounts.
Returns have fallen from the highs of 6% in 2023 down to below 5%. But what is in store for your savings in 2025?
There could be good news for savvy savers
Prediction is a very inexact science, but there could be a return of good news for savers. The worst and biggest savings rate falls could be behind us and the outlook for 2025 is looking better than it was at the start of 2024.
But not all savings accounts are created equal – and having your money in the appropriate kind of account from the most suitable account provider is going to be essential.
In the past year, we’ve seen some big falls across the savings market with easy-access rates falling by 0.40% and fixed terms falling the most by 1%.
This has meant the market has been turned upside down, where some of the highest rates on offer could be found in variable rate accounts. This is mainly because fixed-term savings products are priced based on future expectations of interest rates. It might be a short-term phenomenon, and if variable rates fall, fixed term returns may return to their usual premier position in the savings league.
So which way are interest rates heading? The signs are that inflation is much reduced, if not yet dead, and fears of triggering recession are likely to force the Bank of England to make cuts to the base rate. The markets are still pricing in around two rate cuts, with the base rate expected to settle at 4% towards the end of 2025. Variable rate accounts might therefore offer less as the year goes on.
This might suggest that getting the best rate might depend on choosing a fixed rate account as soon as possible – if you can afford to tie up your cash.
Because the rate is fixed, you’ll know exactly how much interest you’ll get. In an uncertain world, predictability is a rare extra benefit. But remember, unlike easy-access accounts, you can’t usually access your money once it’s fixed until the term ends.
There’s likely to be more choice in the savings market in 2025. We’re likely to see more newcomers enter the market, and the regulator may put pressure on banks to ensure their clients are being paid fair value.
Don’t forget tax
Of course, getting the best return on your savings can actually benefit the taxman as much as it does you. He will be very happy to take a share of the interest your savings earn, as soon as they go above your savings allowance. For the 2024/25 tax year, the savings allowance is set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers (additional rate tax payers do not get an allowance) .This allowance is on top of your personal allowance and your dividend allowance.
It means the promised returns on your savings are in practice drastically reduced. But of course, there is a relatively easy way to be tax efficient with your savings.
Protecting your savings by putting them in a Cash ISA could mean that there would simply be no tax for you to pay on the interest, or when the time came to cash your savings in. There are both variable-rate and fixed-term Cash ISAs available. If you use your Cash ISA allowance to the full, you can save up to £20,000 in 2024/25 tax year.
Getting some help in 2025
Getting some expert help with your finances is always a good idea, and if you are looking at making the most of your savings in 2025, it could be particularly worthwhile.
At Continuum we know all the accounts available on the market and can find you one that is best suited to your savings objectives.
Whatever 2025 has in store for savers, saving could have more in store for you with a call to us at Continuum.
https://moneyweek.com/economy/uk-economy/605427/when-will-interest-rates-go-up
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, or a recommendation to a particular saving strategy you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation advice or deposit accounts.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
When investing your capital is at risk.
Investments do not include the same security of capital which is afforded with a deposit account.
