While the current state of the economy means that interest rates available on savings accounts are nothing to write home about, it's still possible to make the best of a bad situation. We show you how.
While there’s no denying that rates are low in view of the current economic climate, this doesn’t mean that you can’t still make the most of your savings. By shopping around and taking advantage of the best deals out there you can ensure your money is getting the best return it possibly can - so that even when rates are at their lowest your savings are working their hardest.
Get informed
The first thing worth doing is finding out what your savings are currently earning. Perhaps they have been sitting forgotten in an account for years, or perhaps a bonus introductory rate period has recently come to an end. Either way, your savings are likely to be subsisting on a trickle of interest, in which case it will certainly be worth shopping around for a new home for your money.
Find the best deal
As well as finding a savings account that offers a competitive rate of interest, this also means finding one that suits your needs in terms of access, how often interest is paid, and so on. By comparing the savings accounts on the market at the moment you can find an account that gives you the access and features you need at the best possible rate.
When choosing a home for your savings it’s a good idea to find out if the account is instant access or has a fixed rate. Some accounts place restrictions on access either in the form of an interest penalty or simply not permitting access to your money for a fixed term. To get the best deal for your savings, you’ll have to weigh up how much access you will need to your money against how much interest you want to earn.
It’s also worth considering when interest is paid on the account – this will usually be either monthly, quarterly, or annually. Also look into how much you have to invest initially to open the account and then subsequently to keep the account open, and whether you can access the account in-branch or online.
Make the most of introductory offers
Many savings accounts will offer an introductory bonus so that your money will earn interest at an elevated rate for anything from 6 months to a year. Look out for these as they can give a real boost to your savings for a temporary period.
Remember though to make a note of when the introductory bonus ends, because at this point the rate on your savings is likely to drop by a significant amount. When the introductory period comes to an end it’s important to shop around for a new home for your savings so that they continue to work as hard as they can.
Watch out for common pitfalls
Although savings accounts are supposed to be designed to give us a home for our money that will also provide a healthy return in terms of interest, they can also often come with tricks that can catch you out.
For example some accounts come with variable rates of interest, and while this isn’t something to steer clear of as such (as they can still be competitive at the outset) this means that they could be dropped at any time. In this way it’s important to keep a close eye on a variable rate so that if it does plummet, you can move your money elsewhere.
Likewise if you decide to go for an account that has a fixed rate you’ll have to be extra careful of terms and conditions that impose restrictions on how you can access your money. Some accounts will allow no withdrawals or closures during the account term, and will levy an interest penalty if you break these rules. For this reason it’s important to be aware of all the terms behind your account before opening it, so that the interest on your money isn’t suffering unnecessarily.
Get tax-free interest
If you’re a taxpayer any interest your savings earn will automatically be taxed by 20% (40% if you’re a higher rate taxpayer) – that is, unless you stash your money in an ISA. Saving in an ISA is the only way to get tax-free interest on your money and so it’s certainly worth doing.
Everyone can save up to £5,100 in an ISA (increased from £5,100 in October 2009 for those over 50, and in April 2010 for the rest of us). So if you’re looking for a home for your savings ISAs are worth considering, as they simply mean that up to £5,100 of your hard-earned cash can escape the taxman’s grasp.
Beat inflation
A final issue to be aware of when you’re looking for a competitive home for your savings is whether or not the net rate of interest (or gross rate if your savings are in an ISA) is higher than inflation. If the rate of interest you are earning is lower than the rate of inflation, your saved money will actually be going down in value – meaning you are effectively losing money.
As such it’s crucial to ensure the savings account you go for offers a rate that is in line with or higher than inflation. You can do this by checking that the net rate you’re getting is higher than the the rate of inflation – if it drops below this it’s definitely worth moving your savings elsewhere.
