Why is £253bn of cash sitting in bank accounts paying no interest?

A mountain of cash paying no interest to savers built up in the wake of the financial crisis as a result of low interest rates and bank funding schemes introduced by the Bank of England. Between March 2009, when interest rates were cut to the emergency level of 0.5%, and October 2022, this cash pile rose from £58 billion to £272 billion, according to Bank of England data.

Given the dramatic rise in interest rates over the past few years, you might expect this cash mountain to crumble, but remarkably £253 billion still sits in accounts paying zero interest. This is money that is simply wasting away once the effect of inflation is taken into account. It would hold as much value stuffed into a mattress, if you could find one that would hold a quarter of a trillion quid.

Source: Bank of England

The last time interest rates were at 5.25%, in April 2008, there was £33 billion held by households in accounts paying no interest. Even accounting for the increased stock of household savings over that period, that still looks like a phenomenal explosion in this type of account. To give some context, between 2008 and 2024 the amount held in instant access accounts paying some interest has increased from £510 billion to £911 billion, so nowhere near the same level of growth.

Indeed, even that cash held in instant access accounts isn’t paying savers a whole hill of beans in interest. The average rate on cash held in instant access accounts is currently 2.1%. This is below the rate of inflation, and compares very unfavourably to top savings accounts on the market, which are paying in excess of 5%. Savers can wait for banks and building societies to improve their average rates, or take action themselves.

Five ways for savers to avoid accounts paying no interest

1. Keep as little as possible in current accounts. These accounts are transactional and consequently tend to pay very low levels of interest – if any at all. Make sure you do leave enough in there to cover bills and outgoings though to stop you dipping into your overdraft and paying interest and fees.

2. Shop around for the best rate. Trusting your high-street bank or existing provider to give you the best deal on savings won’t get you very far. Use comparison sites or cash savings hubs to find and compare the best rates available on the market.

3. Don’t forget Cash ISAs. You may not be able to get as much in interest from an ISA as the very top savings accounts, but after tax, the protection afforded by the ISA could mean you end up better off. It depends what rate of income tax you pay and how much interest you have from other sources. That’s because the Personal Savings Allowance allows you to receive a certain level of interest tax-free every year. For basic rate taxpayers this amount is £1,000, for higher rate taxpayers it’s £500, and for additional rate taxpayers it’s £0. Interest received annually above these levels is taxable and would therefore benefit from being held in a Cash ISA.

4. Consider Government bonds (gilts). DIY investors have been ploughing large sums of money into bonds issued by the UK Government that don’t have long until they mature but don't pay high levels of interest. These come with a government guarantee of repayment when they mature and much more attractive rates of return now interest rates have risen. The particular appeal though is that capital gains from gilts are tax-free, so if you can identify bonds where almost all the return is coming from capital appreciation rather than an income, you pay less income tax. This approach is only for those who understand gilts and are willing to roll up their sleeves to find appropriate bonds. Find out more about investing in bonds here.

5. Think about investing. Conventional financial advice is you should have three to six months of essential costs in cash, so if you’ve already got this parked in cash accounts, you should think about investing any excess for the longer term. Data from Barclays shows that over 10 years there is a 91% chance shares will outperform cash.