Classic savings mistakes: not switching, ignoring small banks & more

With the cost-of-living crisis raging on, Katy Ward looks at the best ways to maximise your nest egg and avoid common banking tricks.

We all want to make our money work harder, but minor missteps can cost us dearly and help the big banks get even richer.

According to research from Yorkshire Building Society, millions of Brits are losing more than £1,000 a year because their savings are languishing in low-interest accounts.

There are almost 13 million current accounts held in the UK, with a balance of over £5,001, and the average standing balance is £23,600, according to the data.

In 2024, however, the net profit of the largest UK banks ranged from £4.48 billion to £19.98 billion, the Bank of England found.

In this article, we examine some of the biggest savings blunders – and how to prevent banks from lining their pockets with your hard-earned cash.

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1. Sticking with a High Street bank

If you have savings in an easy-access account with your High Street bank, chances are you’re getting a paltry rate.

Research from Which? last year highlighted how the big players consistently lag behind their smaller rivals. 

While major banks were averaging a mere 1.9% on their savings products, newer rivals offered around 3.3%. Building societies, meanwhile, were averaging 2.9%

Take a look at any 'best buy' savings tables right now and you'll see they're dominated by smaller players.

At the time of writing, the best Cash ISA rate is from Moneybox (5.71%), the top notice account is from Oxbury Bank (4.85%) and the best fixed-rate account is from Isbank via the Raisin savings platform (4.73%).

If you want a top rate, you need to look beyond the High Street.

2. Failing to switch

Banks count on us to be lazy.

They’ll offer attractive rates and joining incentives to new customers, often worth hundreds of pounds.

However, loyal customers frequently languish on rock-bottom returns.

The best rates change frequently, so you may need to move your money regularly to stay ahead.

Consider setting calendar reminders or sign up for rate alerts to avoid being caught off guard.

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3. Falling for the bonus trap

Many banks inflate savings rates for the first year to lure in new customers.

If your bank offers you a “bonus rate”, check the fine print, as these often drop after 12 months, sometimes even sooner.

Bonus rates are fine as long as you're willing to move your money again once it expires. Otherwise, you're better off choosing an account with a lower rate that doesn't have an expiration date.

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4. Not investing cash you don’t need

If you have money sitting in a savings account that you know you won't need for a long time, you could be better off investing your funds instead.

Over five years or more, investing in stocks and shares has historically outperformed cash savings.

This is despite ups-and-downs in the market.

With inflation eroding the value of your savings, the biggest risk could be doing nothing.

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5. Locking your money away

When you’re saving, it’s essential to consider if you’ll need access to your money – and when.

Fixed-rate accounts that require you to lock your money away for a set period may offer better returns over the short term.

However, this is a gamble in the current climate of economic volatility.

If interest rates rise while your money is locked away, you could be stuck with an uncompetitive deal.

Worse still, if you need to access your savings before the term is over or decide to switch, you may face substantial penalties.

6. Not avoiding tax

Every UK adult has a £20,000 ISA allowance per tax year.

If you’re paying tax on your savings or investments, an ISA could help you keep more of your money.

However, many Brits don’t make the most of it.

Nevertheless, it’s crucial to consider which type of ISA is best for your circumstances.

A Cash ISA can shield your savings from tax, but a Stocks and Shares ISA will likely offer better returns in the long term.

Worryingly, there were rumours that the Government may slash this to £4,000 in this week’s Spring Statement, but luckily it seems these plans have been shelved.

7. Saving more than £85,000 with the same group

Sadly, we all need to consider the solvency of banks – a fact highlighted by the 2008 financial crisis.

But there is protection.

The Financial Services Compensation Scheme (FSCS) protects up to £85,000 per person, per banking licence.

However, you need to be aware that multiple banks operate under the same licence.

For instance, Halifax and Bank of Scotland share a licence, as do HSBC and First Direct.

This means any amounts above that limit could be at risk.

8. Forgetting to review your savings strategy

Vigilance is key when it comes to saving.

We all know interest rates change and tax rules shift.

The best deals today may be terrible in a year.

If you’re not checking in on your savings at least once a year, you could be losing out.

Have your say

Are you guilty of any of these mistakes?

Perhaps you’ve found a savings hack you’d like to share with other readers?

We’d love to hear your thoughts in the comments below.