When it comes to choosing a home for your savings there are lots of things to consider. We give you our top 6 tips for getting the best possible interest rate on your savings.
Choosing where to save your money can be a tough decision. With all the different options to consider, it may seem easier to simply open an account with whoever you usually bank with, rather than seeking out the best one on the market.
However, while such an approach may save you time, it’s unlikely to help your cash to work its hardest by offering you the right combination of access and interest-earning ability. We give you our top six tips for making sure you get the best possible deal on your savings account.
1. Shop around
When looking for a place to save your money it’s always better to shop around and really do your research rather than sticking with the bank you know and love. Though having your current and savings accounts in the same place may be convenient, opening a savings account where you bank shouldn’t automatically be your first choice.
Instead you’ll benefit much more by looking at the wealth of savings accounts on offer and choosing one that truly suits your needs, depending on the amount you intend to save, how much access you’ll need on your money, and what sort of return you expect to get from your savings from interest.
2. Get the best rate for the amount you’re saving
First you'll have to decide on how much you want to save. For example, do you plan to trickle small amounts into your account regularly, or deposit a large amount and leave it there?
If you’re going for the latter and want to leave your money untouched earning interest, it may be beneficial to get a fixed term account. You won’t be able to access your money for the account term (which can be anything up to several years depending on the account you choose), but you’ll enjoy some of the most competitive rates of interest available.
However if you plan to open an account with a relatively small amount and to keep adding to it little by little, you may be better off with an instant access account – though the interest rate is likely to be lower, you’ll be able to access your money whenever you want without suffering penalties to your rate.
Another option to consider is a regular saver account, which tend to offer very competitive rates of interest but come with strict sets of terms and conditions. The majority of regular saver accounts will specify a certain amount that you have to pay in every month for a fixed period of time. Access to your money in such an account may also be limited, as your rate may be penalised if you make a withdrawal or don’t contribute the agreed amount on time.
3. Make the most of introductory bonuses
An introductory bonus on your account means that your savings will benefit from an elevated rate of interest for a certain period of time. Many savings providers pay introductory bonuses on savings accounts so as to temporarily inflate the ‘headline’ rate of interest and draw in new customers.
On the whole an introductory bonus is worth taking advantage of, as it will give your savings an undeniably healthy boost - even if only for a short time. The important thing to remember however is to check the rate that will be paid on your savings after the bonus period comes to an end.
As the rate will revert to the account’s standard rate of at the end of any introductory period, it’s likely that the return on your savings will become far less competitive. As such you will then need to move your savings to a new home if you want to continue to maximise their earning potential.
4. Get to know your account terms
Savings accounts, though intended to help us get the most out of our money, can also be governed by notoriously tricky terms and conditions which, if not strictly followed, can mean your interest rate is slashed considerably or your account is down-graded. By making sure you are well-acquainted with your chosen savings account’s stipulations and clauses before you open it, you can avoid being caught out by a condition you weren’t aware of.
For example many fixed term accounts offer an extremely attractive rate of interest but if you flout the rules of the account in any way (most commonly by withdrawing money before the end of the account term) you’ll more often than not suffer an interest rate penalty.
This means your rate will be cut and your account may revert to a more basic savings account, undoing all your hard work of saving in the fixed-rate account in the first place.
You may also get caught out by penalties when you don’t keep the account balance above a minimum amount, or if you don’t pay in a certain amount every month, so this is worth checking before you open your account.
5. Don’t get caught out by variable rates
If you decide to go for an instant access or regular savings account your rate of interest may be variable. This means that it could drop at any time, at the provider’s discretion.
As such, though accounts such as these can have a competitive rate of interest upon opening, this could decrease significantly soon after due to any number of outside influences such as fluctuations in the market or changes in your provider’s savings mentality. It’s unlikely that a variable rate on your savings will increase.
For this reason it’s important to find out whether the rate paid on your account is fixed or variable. If it’s fixed, make a note of when the fixed rate expires and make sure you shop around for a better rate once it drops. If it’s variable, you’ll need to check how competitive it is on a regular basis to ensure it’s still earning you a decent return.
6. Only pay tax on what you have to
Any interest earned on money in a savings account is automatically taxed by 20% (or 40% or 50% if you’re a higher-rate taxpayer) - so the rate of interest actually paid on your money is always net (the rate post-tax) rather than gross (the pre-tax rate). However there is a way to earn interest on your savings completely tax-free, and that’s by opening an ISA.
Cash ISAs are the only type of savings account that pay you interest in full without deducting tax, and you can deposit up to £5,340 in a Cash ISA this tax year. As such it’s certainly worth filling your ISA allowance and benefitting from tax-free interest on your savings before you have to surrender any part of your interest to the tax-man.
By making yourself aware of the different savings accounts available and their individual terms and conditions, you’ll be able to find the perfect account for you. Our ‘Advanced Search’ can help you zero in on the kind of account you’re looking for by searching for the features and benefits you want - so you can pick out a savings account that pays you a decent amount of interest while allowing you the access you need to your money.
