What will happen to savings rates in 2025? Here are 5 key trends

Cash savings have enjoyed something of a renaissance in recent years, first through the stockpiling of money during Covid and, secondly, through the increased savings rate environment following the 2022 mini-Budget.

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As we head into 2025, there are several themes for savers to watch out for.

1. Rates will fall, but more gently than anticipated

Savings rates have peaked from the highs of early 2024 and will continue to fall in the next 12 months, but I suspect at a slower pace than originally anticipated.

A major influence on savings rates is what is known as the swaps market, which is the financial market’s view of where the Bank of England Base Rate will be in the future. As the markets expected the Base Rate to fall on the back of receding inflation, swap rates were coming down through much of 2024.

However, the Autumn Budget has slightly altered that trajectory. Swaps were higher in the final quarter of the year, with the expectation that the Bank will have to slow the path of Base Rate reductions.

Although savings rates are expected to be a little lower at the end of 2025 than at the start, this change in outlook for Base Rate should underpin the market for a little longer.

In addition, many banks also need to repay billions of pounds in loans to the Bank of England from the Covid period, so demand for savings deposits will remain robust during the year, providing further support for competitive market pricing.

2. ISA demand will remain strong

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ISAs have enjoyed a resurgence over the past two years and 2025 will be no different. With the Government set to generate £10.4 billion from tax on savings interest this year, the demand for the tax-free shelter is clear.

Given income tax thresholds have been frozen until the 2027/28 tax year, more and more people will move into higher tax brackets, reducing the allowance available to them before they incur tax on their interest.

Savers have increasingly turned to ISAs, with nearly £100 billion more sitting in cash ISA balances at the end of September 2024 than two years previously. Paragon enjoyed its busiest ever ISA season last April and we expect this year to be as busy, if not more so.

3. A further easing of the ‘switch to fix trend’ as rates mature

There is £259 billion in fixed-rate savings due to mature over the next 12 months and I would expect the unwinding of the ‘switch to fix’ trend to continue into the new year.

Following the mini-Budget, cash was ploughed into fixed-rate products during 2023 at unprecedented levels as rates rose. This year, we saw that moderate.

Rates on access products have been attractive and are typically higher than three or five-year fixed-rate products, diminishing the appeal of locking your money away for longer for some. As a result, more savers have opted for the access product option.

Given the huge volume of accounts maturing during the year, I’d suggest that trend will continue.

4. Greater tech choice for savers

The avenues for offering savings accounts are expanding and diverging, providing more options for savers. This expansion is expected to continue into 2025.

For example, the range of app-only options for savers who want a simple savings account with a competitive rate is growing. These are self-serve options, with users engaging with their bank within the app rather than by phone.

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These consumers don’t require the full-service functionality or what might be more appropriate for more complex needs, such as ISA savers, joint account holders or those with Power of Attorney. For these groups, access to postal accounts or online desktop accounts remains important, as does a service centre attuned to their more sophisticated needs.

Savings propositions launching with very specific target customer groups will become more prevalent, enabled by technology.

5. Greater levels of gifting to reduce inheritance tax bills

The Autumn Budget saw some significant changes to Inheritance Tax (IHT), most notably the inclusion of inherited pensions in IHT calculations from April 2027. Currently, 4% of estates incur IHT and this is forecast to rise to 7% due to the package of changes announced.

The inter-generational transfer of wealth has been a hot subject for several years as the post-war generation reaches their mature years. There could now be an acceleration of assets handed down to children and grandchildren early to shrink estates and reduce the IHT burden.

Every individual can give away up to £3,000 every year without it being added to the value of their estate, while gifts of £250 and wedding gifts are also exempt from IHT. Cash gifts larger than that are also free from IHT, as long as the person gifting the money lives for longer than seven years.

There are two elements to consider here. One, what will the recipient of the money do – keep it in cash, invest it, spend it or use it to buy a house? The outcome will have interesting implications for the broader economy.

Second, is the person gifting the money considering their future requirements? For example, people who require care often need quick access to their money, so I would suggest anybody considering this route consult a financial planning specialist.

Derek Sprawling is managing director of savings at Paragon Bank