Switch your savings bank as interest rates skyrocket

Savings accounts have paid next to nothing for more than a decade, but suddenly interest rates are shooting upwards. That is terrific news for millions who prefer to leave their money in cash than invest in the stock market. Yet not everybody is benefiting from the great savings rate comeback. 

While the new breed of smaller "challenger" banks is competing to offer top deals, the big high street banks rarely appear in the best buy tables. 

Many continue to pay as little as 0.20 per cent at a time when the best deals are racing past four per cent. 

This means you could get 20 times the interest by dumping your underperforming bank account in favour of one that will treat you with respect. 

Loyalty doesn't pay when it comes to financial services, as savers have learned to their cost. Banks typically reserve their best deals to attract new customers, leaving existing savers earning a pittance. 

There's even a phrase for it: the loyalty penalty. Every penny counts as the cost of living soars, so savers shouldn’t put up with this.  

Switching savings account is easier than you think, and it is worth taking a few minutes out of your day to do it. If you had £10,000 earning just 0.02 per cent, your interest would total just £20 a year. At four per cent, you will get £400.  

Some of the best deals on the market are offered by smaller banks you may never have heard of, but don't let that put you off. 

Just make sure they are covered by the Financial Services Compensation Scheme (FSCS), which offers government protection for the first £85,000 of savings. 

If a challenger bank is covered by the FSCS, and nearly all are, then your money is just as safe as if you left it with the big boys. The only difference is that you will be get a lot more interest. 

Interest rates are expected to continue climbing as the Bank of England battles to curb inflation, and savings rates will follow. So, it is worth regularly checking to see whether your money is in the right place. 

Today, some of the highest interest rates are paid by one and two-year fixed-rate bonds, which involve locking your money away for a fixed term. 

This leaves savers facing a tough choice. Should they take out a top fixed-rate bond today, or delay in the hope of getting even more tomorrow? 

Waiting is tempting as savings rates could top six or seven per cent in the spring, although there are no guarantees of that. The downside is that if you leave money sitting in a low interest savings account, you will lose money today. 

One option is to mix-and-match by locking up half your money in a fixed rate bond for a year or two, while leaving the remainder in an easy access account, ready to fix later. 

Alternatively, you could put it into a best buy 90-day or 120-day savings account and move on once that rate expires.  

At least savers now have options. The one thing they must not do is trust in their bank to pass on interest rate rises. It's not going to happen. 

Read more: Broadband costs: How to save serious money

Read more: 7 Money saving tips to beat the cost-of-living crisis

Keep up with the top stories from Reader's Digest by subscribing to our weekly newsletter