Insights 3min(s)

UK Retirees Face Shrinking Window for High Savings Rates

For many British retirees, the past decade has been a struggle to grow their nest eggs. Low interest rates meant their savings barely kept pace with inflation, let alone generate meaningful income. However, a crucial shift could be underway, offering a potential lifeline.

Locking In Before Rates Fall

Data from Moneyfacts* shows a decline in top online one-year fixed-rate ISAs, dropping from 5.01% in January 2024 to 4.72% today. Interestingly, the best three-year fixed rate ISA has only dipped slightly, from 4.65% to 4.41%. This trend suggests locking into a longer-term account now could be a wise move to secure a higher return before rates potentially fall in line with a predicted base rate cut.

"This is a clear opportunity for retirees to solidify their financial future," says Adam Thrower, head of savings at Shawbrook. "Interest rates on longer-term savings accounts, both ISAs and non-ISAs between three and seven years are fairly high and stable, but with potential future base rate declines on the horizon, locking in now could be a game-changer."


Surge in Long-Term Interest

Research by Shawbrook found that 41% of people over 55 plan to use their savings for retirement. However, a focus on short-term, easy-access accounts might be costing them a valuable opportunity.

The trend towards longer-term fixed is undeniable. In April, demand for its new three and five-year ISA accounts surged by over six times compared to the previous quarter. ** As the Bank of England's message of potentially higher interest rates for longer seeps into the market, longer-term fixes are holding their rates steady compared to shorter terms.


Time Running Out for Inflation-Busting Rates

For the one-third of over 55s planning to make the most of their savings when they stop working, the window to lock in an inflation-beating rate for the years ahead is closing fast. While there are still one-year bonds and easy-access accounts offering slightly higher headline rates today, Adam emphasises the benefits of locking into longer-term accounts.

"Locking in now with today's advantageous rates guarantees a predictable income stream for years to come, regardless of future rate cuts," he says. “However it is prudent to remember the unexpected can always happen – if base rates do increase, savers who have fixed could jeopardise higher returns.”

Other key considerations: 

  • Compound or Income: Fixed-term deposits restrict access to your money, but interest can be paid out in different ways. Monthly payouts can function as an alternative income stream, while resisting the income for monthly or yearly interest payments leverage the power of compounding, where interest earns interest over time.
  • Guaranteed Rates vs. Potential Reductions: Locking in for a long period might not suit everyone. Those needing access to cash might find one-year or easy-access accounts more suitable, although rates could decrease as the Bank of England reduces base rates later this year.
  • Tax Advantages: ISAs are a valuable tool for saving goals due to tax-free interest. This is particularly relevant with frozen income tax thresholds pushing many into higher tax brackets.

Seek Expert Guidance

While longer-term savings accounts offer a compelling option, consulting with an independent financial advisor is advisable when retirement planning. They can assess your individual circumstances and recommend the most suitable account type and term length to meet your specific needs, ensuring you maximise your income potential.

"Don't let the future of your retirement income depend on volatile interest rates," concludes Thrower. "While this may be a time-sensitive opportunity to secure an element of your financial well-being, it’s important to understand the implications if interest rates were to unexpectedly rise. Talk to your advisor and explore the benefits of longer-term savings accounts”


*Moneyfacts data 02/05/2024 
**Shawbrook reports a 516% increase in new fixed rated rate 3-5 year ISAs being opened in  April compared to January, February and March combined. 

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