Savings rates in 2025: what’s the best home for your cash?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

The far right-hand side of the chart shows the recent past, including the period from October 2023 when rates began to at last exceed inflation. You can also see the effect of rate falls that have happened this year which, combined with an upturn in inflation, have reduced the real return from cash.

The Bank of England produces forecasts for inflation and right now it expects inflation to climb even higher before falling back again. Specifically, it expects inflation to reach 2.75% by the second half of 2025¹.

Where next for cash savings rates?

It’s possible to form a view of where interest rates in general - including cash rates - will head in the future based on financial markets today. The price of assets which pay a fixed income, such as government bonds, can be used to work this out.

Right now the bond market is suggesting that the Bank Rate will fall from its current level of 4.75% to around 4% by the end of 2025, as shown in the chart below.

Note - the figures in the chart are purely indicative, the reality is that the Bank of England tends to move rates in 0.25 percentage point increments. And remember, the interest paid on savings accounts is determined by individual saving providers so this is best used as a guide to the direction of rates rather than a firm prediction of what return you’ll get.

This represents a slightly slower fall in rates than has been expected at times in 2024. More persistent inflation has put upward pressure on rate expectations because it will require more restricted rates to get it under control.

Nonetheless, taken alongside predictions for a rise in inflation, it’s possible to foresee the real return from cash - what’s left after inflation has been taken into account - will fall in 2025.

Cash vs investments

With returns on cash likely to fall, is it time to rebalance your allocation of cash versus investments?

Cash and investments both play an important - and different - role - in your financial mix. It makes sense to hold a sum of cash that you can dip into in an emergency - an amount worth three to six months of income is recommended. This actually helps your investing because it means you won’t have to sell investments to produce cash in a pinch.

Beyond that, it can also make sense to hold cash on the sidelines that you are willing to use to take advantage of investment buying opportunities as they arise. Cash will not lose value in nominal terms (although it can lose value to inflation) whereas investments can fall in value.

The compensation for taking that risk is the potential that investments can produce a higher return - with the chance, of course, that they don’t.

Cash accounts vs. cash funds

There are a number of potential homes for money you decide is best held in cash.

It makes sense to shield your cash returns from tax if you can, which means using part of your £20,000 annual ISA allowance to hold cash. Cash ISAs do this job - although any allowance you use for cash cannot then be used for investments.

Non-ISA cash accounts also exist but returns are potentially subject to tax at your rate of income tax, subject to certain allowances.

For this reason, some savers choose Premium Bonds, where there is no guaranteed rate of interest but monthly prizes are paid instead. Prizes are tax free but the rates of return on Premium Bonds have also been falling. Moreover, you have to have above average luck in order to get those rates, as we explain here.

An increasingly popular cash option is to move cash savings to an investment account but utilise assets which produce a cash-like return while rates remain somewhat attractive. That would allow you to take advantage of the real return from cash while it lasts, but also leave you ready to switch to investments if and when that suits you.

Cash funds or money market funds held inside investment accounts can do this job. The Fidelity Cash Fund is the best-selling cash fund on the Fidelity Investing platform and is forecast to produce 4.96% of income in the coming year - or 4.61% after deducting the Fidelity platform charge of 0.35%.² Please note this yield could down or up and is not guaranteed.

You can also earn interest on money held in your investment account even if you don’t invest it into a cash fund. Fidelity offers interest on cash and you can learn more about how we manage your cash here.

Source:

¹ Bank of England explainers, 7 November 2024
² Fidelity International, 21 November 2024