Do you have too much money in your current account?

Figures from the Bank of England show that we have over £250 billion in accounts earning no interest whatsoever. 

The average household has £8,311 in their current account, according to new research from Hargreaves Lansdown, and missing out on hundreds of pounds in savings interest as a result. 

By moving that money into a cash ISA paying around 5%, savvy savers could earn roughly £400 more in interest each year. 

There are lots of reasons why people build up big balances on their current accounts. 

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown says: “In retirement, when you’re on a fixed income that’s lower than your most recent salary, there’s always the worry about how you’ll cope with a cost out of the blue.  

“When you’re approaching retirement, and can see this situation on the horizon, it can raise the same kinds of concerns too.” 

Alice Haine, Personal Finance Analyst at investment comparison platform BestInvest, agrees: “Some over-50s may take comfort from seeing a large current account balance as it means they have money at hand whenever they need it.  

“Research has found almost half of over 50s feel anxious about unexpected costs, so a large cash buffer in a current account can be comforting.  

“Some may also want ready cash to help other cash-strapped family members, such as elderly parents or adult children at the start of their careers.

“However, people who store large cash balances in their current account often do so because of apathy.  

“Some may have stayed with the same high-street bank for their entire lives and feel a sense of customer loyalty.” 

Making your cash work harder 

Although it might be comforting to have cash on hand, your current account isn’t the best place to keep it. 

Anna Bowes, co-founder of SavingsChampion, says: “If you switch money into an easy access account, you can still get hold of it whenever you like, but earn some meaningful returns. The top easy access accounts are paying up to 5.1%” 

“For each £10,000 that’s currently left in a current account paying no interest, you are missing out on more than £500 gross each year. Would you say no if someone handed you that sort of cash?” 

Coles adds: “When [your cash] is so readily to hand, there is also the chance you dip into it by accident and put a dent in your financial resilience.” 

The Financial Conduct Authority has a handy calculator to help you work out how much extra interest you could earn by switching to a better savings account. 

Finding the right account 

It’s simple to compare rates on easy access savings accounts, with many platforms available that offer an easy comparison between multiple options but it’s important to be aware of terms and conditions that could catch you out. 

A big one for easy access accounts is bonus rates, which can be added to the overall rate for a period of time, but drop after that time.

There’s nothing wrong with taking out a savings account that includes a bonus – but it’s important you make a note of when the rate will drop to remind yourself to switch to a better deal in time.  

However, if you know you’re the sort of person that will forget to do that, it might just be better to go for a lower rate that doesn’t include a bonus but offers a straightforward overall reward.  

Use your ISA allowance 

When choosing an account, you'll have the choice between ordinary easy access accounts or easy access ISAs. Unless you’ve used up your ISA allowance or don't have enough allowance remaining, it will normally make sense to plump for the ISA. 

Each year you can (at the time of writing) invest up to £20,000 in ISAs where your money will be sheltered from tax.  

This is particularly important if you are likely to pay income tax on your savings interest. The personal savings allowance means basic rate taxpayers can earn up to £1,000 interest before it will be taxed, compared to £500 for people that pay higher rate tax (and no allowance for those paying the additional rate).  

So, a basic rate taxpayer with money in an account paying 5% interest would start paying tax on interest once their balance exceeds £20,000, or over £10,000 if they pay higher-rate tax.

Using an ISA also means that you don’t need to declare savings interest on your tax return, if you complete one. 

How much emergency savings cash do I need? 

For most savers, experts recommend having six to 12 months 'must have’ spending in an easy access account – i.e. enough to cover a mortgage, clothing, food and transport.  

However, Coles points out this might not be enough for older savers. 

“You should have even more emergency savings when you retire – the recommendation is one to three years’ of essential spending,” she says. 

Once you have enough set aside for emergencies, it’s worth thinking beyond easy access accounts to increase your returns and protect your money from inflation. 

Coles says: “For cash you expect to need in the next five years, savings accounts make the most sense, but you should be able to tie some of it up for periods in fixed-rate accounts.”  

Fixed rate accounts – also known as bonds - pay a guaranteed rate of interest for anything from one year to five. 

“Usually, you get a better interest rate in return [than instant access],” adds Coles. 

 “When variable rates fall, your interest rate will be guaranteed for the length of the fix. It means these accounts may well leave you better off over time.”

However, if you think you can leave your money untouched for five to 10 years, you might want to consider investing some of it. This is a riskier option and you might not get back all the money you put in, as markets can rise and fall. 

Coles says: “If you are holding [an investment] for a longer period, it will usually have time to ride this out, and produce better returns than cash savings.  

“If you’re not sure about investment, it can help to start small, and build your confidence and knowledge over time.” 

The Barclays Equity-Gilt study– which has compared cash and equity returns from 1899 to 2022 – has found that over any 10-year period, there is a 91% chance that stocks and shares will perform better than cash, although this doesn’t mean the same will be true for the future, as market performance can change rapidly. 

If you’re at all unsure, make sure you get advice from a qualified professional – they can help guide you on the best way to achieve your financial goals. 

Key takeaways: 

• Keeping too much money in your current account means you could be missing out on hundreds of pounds in interest every year. 
• You can earn around 5% in an easy access savings account – meaning you can still get to your money if you need it. 
• If you have enough money set aside for emergencies it may be worth considering longer-term fixed-rate accounts or investing your cash.