After years of relative dormancy, the savings market burst into life at the end of 2022 as consumers finally felt compelled to move their money in search of better rates.

Savings account switching activity hit its highest level for 15 years during the final quarter of the year and the pace of activity has continued into 2023.

Analysis of data from CACI, which monitors the savings deposits of 34 leading providers of adult cash savings, found that £32 billion was placed into new savings accounts during October last year, with £24 billion in November.

To put that into context, the amount placed in new accounts during November in the previous three years was £6 billion, £6.3 billion and £8 billion.

The driver of the change? Rate. With average rates on the rise, savers have been prompted into action with the incentive of better returns.

Additionally, high street banks have added headline-grabbing linked savings accounts into their marketing mix as they compete for current account business, on top of the cash incentives that have been a staple of recent years.

The great savings switch suggests we are heading for one of the busiest ISA seasons on record.

The latest Moneyfacts data shows that ISA rates have risen considerably over the past 12 months. In February last year the average easy access ISA rate stood at 0.26%; this year it’s 1.85%. Term accounts have experienced steeper increases, with the average one-year fixed-rate account hitting 3.41% from 0.60% and average five-year ISA rates at 4.04% against 1.51% last February. 

Fixed-rate ISAs have proven particularly popular, at the expense of easy access.  CACI data from December, the latest figures available, showed that the month ended with £89.7 billion of savers’ money in fixed-rate ISA accounts, up from £79.4 billion at the end of September. To put that growth into further context, the balance in September 2021 stood at £77.2 billion.

Conversely, the amount in easy access ISA accounts fell from £176.4 billion in September to £167.8 billion at the end of the year.

Where the market heads next will depend on future interest rate expectations that influence both borrowing and savings rates. Swaps are essentially a forecast of where interest rates will be at the end of a given period and, with the economic outlook brightening and inflation on the way down, the markets are forecasting that longer-term rates will be lower in the future.

Therefore, five-year swap rates are currently lower than shorter-term rates so we are likely to face the unusual situation where the rates on five-year fixed-rate savings products could be below rates on one or two-year fixed-rates.

For savers, the question is what action to take as the Bank of England’s recent spate of rate increases slows and the rates on longer-term fixed-rate savings accounts may have peaked.

As we head towards the end of the tax year, the changing dynamics of the market and increased importance of ISAs for those with a material lump sum or falling into higher tax brackets should see a healthy appetite for tax free savings many savers will be hoping for a plateau, rather than a plummet to rates.

Derek Sprawling
Savings Director, Paragon Bank