Variable savings accounts a “casualty” of base rate cuts as returns fall to lowest levels since 2023

With further base rate reductions expected this year, should savers consider a fixed account for guaranteed returns?

Savers may be hopeful the Bank of England’s Monetary Policy Committee (MPC) maintains the UK’s central interest rate at its current level when it meets later this week, after three cuts within the space of six months sent variable returns tumbling.

Following last month’s base rate reduction, the average rate paid by an easy access savings account dropped from 2.90% at the beginning of February to 2.84% by March. Meanwhile, the rate paid by an average notice account similarly declined from 3.99% to 3.84% over the same period. As a result, typical accounts in both sectors offer considerably less than a year ago (when an easy access and notice account paid 3.18% and 4.27%, respectively, on average); the last time both rates were lower was August 2023.

“Variable savings rates across the spectrum have become an inevitable casualty of the Bank of England’s base rate cuts”, explained Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.

While easy access accounts are “a staple for many savers” due to the flexibility they afford, Springall said some may now be considering alternatives that offer “a guaranteed return” – especially with further reductions on the cards for this year.

Fixed bonds show signs of stability

Although changes to the base rate tend to affect variable accounts most acutely, fixed bonds aren’t immune to cuts. Those with a one-year bond set to mature and looking for a similar deal will find a typical account in the sector pays 0.46 percentage points less than in March 2024.

But, while fixed rates remain on a downward trajectory, Springall highlighted “the margins of falls are not as aggressive as seen in previous months”. Indeed, average returns on a one-year fixed bond fell from 4.19% to 4.15% month-on-month, while the average rate paid by a longer-term fixed bond (of over 550 days) dropped just 0.01 percentage point to 3.96%.

More encouragingly, the average shelf-life of a fixed bond increased from 48 to 66 days in the month to March – its longest in three years. This demonstrates greater stability within the market and, in theory, should allow savers more time to take advantage of an attractive offer. That being said, it doesn’t prevent providers amending their ranges at short notice, so it may still be prudent to act fast after finding an attractive deal.

ISA choice continues to thrive

Alternatively, with the Office for Budget Responsibility (OBR) estimating there’ll be 2.5 million more higher-rate taxpayers in the 2025/26 tax-year, those worried about being dragged up a tax band (and having their tax-free savings allowance slashed as a result) may want to consider an ISA.

While average returns on variable ISAs also dropped to their lowest levels in over 18 months (with a typical easy access and notice ISA paying 3.02% and 3.79%, respectively), average fixed ISA rates were slightly more steadfast. Typical returns on a one-year fixed ISA saw a marginal decline of 0.01 percentage point month-on-month to pay 4.07%, while the average rate paid by a longer-term fixed ISA conversely rose 0.01 percentage points to reach 3.95%.

What’s more, the number of ISAs for savers to choose from grew for a consecutive month despite overall product choice in the savings market falling. This may be in part due to providers launching attractive new products in an attempt to entice savers looking to use their £20,000 ISA allowance before it automatically resets when the new tax-year begins in less than three weeks’ time.