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Brits missing out on £13 billion worth of interest each year

by Thea Coates Finance Reporter
16th Jan 24 12:03 pm

£253bn is lying dormant in non-interest bearing accounts, according to analysis by smart money app Plum.

While the amount of money left in zero-interest accounts has fallen from £268bn to £253bn over 12 months, it still leaves households missing out potentially on £13bn of annual interest.

Around 14% of household savings overall are currently sitting idle in easy access and flexible accounts where no interest is being earned. The value of these zero-interest savings are particularly vulnerable to being eroded by inflation. For example, £1,000 in cash would drop in value to £825.89 after five years, with an inflation rate of 3.9%.

Plum’s analysis is based on the latest Bank of England figures, which show growth in the level of household savings. The total amount held in current accounts, easy access, fixed-rate accounts and cash Isas in November increased compared with the previous month, now standing at £1.75 trillion.

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But, the nation’s savings could still have overall lost as much as £33 billion over the past year in real terms, based on the current inflation level and assuming savings were earning the average easy-access rate. For example, the average saver with £1,000 in an easy-access account will find it’s now worth £982 in real terms, having got an average of 1.99% interest over that period.

In more positive news, the top rate easy-access accounts are now paying a higher interest rate than the inflation rate, so savers can finally make a real return. As an example, if a saver was to benefit from the full current base rate on their savings over 12 months, they would find their savings of £1000 would be worth £1014 in real terms, assuming the rate of inflation is again 3.9% this time next year.

Victor Trokoudes, CEO and Founder of Plum said, “While it’s promising that the proportion of savings in zero-interest accounts is falling, a high proportion of hard-earned savings are still earning little to no interest. That means people are missing out on an opportunity not only to grow their money over time, but achieve real-terms increases in their savings as interest rates currently exceed inflation.

“It’s welcome that the FCA has put more pressure on the high street banks to offer savings rates that more closely reflect the increase in the base rate, so savers can benefit. However, an average rate of 1.99% on easy access deposits is still not fair when the base rate remains at 5.25%. Borrowers are paying more while savers see minimal benefits, highlighting that the business models of the major banks are inherently misaligned with the interests of their customers

“Importantly, there are some financial organisations now offering rates closer to the base rate. That means the incentive is now far more attractive for people to put their savings to work. With economists expecting interest rates to fall this year, it’s even more important people take advantage of real positive returns now.”

So why aren’t people putting their money to work? 

Despite rising savings rates and falling inflation, Plum research found that close to 1 in 5 (17%) didn’t know whether their money was earning interest or not.

Consumers said the most common barrier to growing their money was interest rates from financial firms being too low (27%), with frustration about these rates meaning many conclude it is not worth taking any action. The highest high street bank easy access rates are still around just 2.5%, even though almost half (49%) of the public think the rate should be higher than 5%, far closer to the current Bank of England base rate at 5.25%

Worryingly, 44% did not understand to what extent inflation was eroding the value of their savings, which means they may be less inclined to take action to ensure they don’t lose their spending power. The current level of inflation means you need £1,039 today to match £1,000 of purchasing power 12 months ago. That means you’re £39 out of pocket if you wanted to buy the same things today and had not received any interest on the £1,000.

To help people get their savings working harder for them so they can achieve their financial goals, Plum is launching a campaign to ‘Wake Up Your Money”.

Victor adds, “Your money shouldn’t just be lying there, it should be working as hard as you do. But without the right wake-up call, it will continue to snooze. That’s why we’re launching our “Wake Up Your Money” campaign to encourage people to take action.

“Even if we know we should have a plan and be saving for the future, the demands of daily life can leave that feeling like a pipe dream. That’s why apps like Plum which automate your savings make this a lot more convenient so you can focus on living your life today, knowing you’re not neglecting financial planning for the future.”

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