You may be building up a decent nest egg for a rainy day, but do you really know how much your savings are earning in interest?
All of us want the reassurance of knowing that we have a little extra stashed away. But do you really know what your savings are paying you? The shocking reality is that they could in fact be losing you money!
We show you how to find out exactly what interest your savings are earning and how to make sure they’re working as hard as they possibly can.
What's your rate?
If it's been a while since you last checked the rate of interest paid on your savings, now's the time to do it. This will help you see how it measures up to other accounts on the market and, if necessary, find a new home for your money if your account proves to be uncompetitive.
This is definitely worth doing as while it’s likely that you were well aware of the rate paid on your savings when you opened the account, the return may have changed dramatically since then, particularly if the advertised rate of interest was variable rather than fixed. For this reason it’s essential to check what your savings are now earning rather than simply assuming they’ll be paying interest at a decent rate.
As the rates payable on most savings accounts drop significantly after they stop being promoted, you could realistically be earning less than 1% interest on your money.
For example, it's quite conceivable that a savings account you opened expecting to earn 6% AER could, unbeknownst to you, now be paying you pittance. Unfortunately, for older accounts this dramatic drop in interest rates isn't anything out of the norm.
Of course, the exception to this is if your savings are sitting within a fixed rate bond that is still within its account term. In this case you can be confident that the promised rate of interest will be paid on your savings until the term end date. However, after this you will need to review your savings as the rate payable is likely to drop dramatically.
It's easy to find out your account’s current rate of interest - all you need to do is take a look at your most recent savings account statement, or if you opt for paperless statements, check your account online. You can also contact your branch and ask them what your savings are currently earning.
If you opened the account a while ago and it’s now closed to new customers, you should be able to find a ‘closed account’ page on your savings provider’s website which will tell you what your current rate of interest is.
How much tax are you paying?
Remember that any interest earned on your savings is counted as a form of income, so if you are a tax-payer, your interest will be taxed. This means if you’re a basic-rate taxpayer 20% of your earned interest will be automatically deducted, 40% if you’re a higher-rate tax-payer and 50% if you pay tax at the additional rate. On your savings statements you'll usually only see a net interest figure, as many providers deduct tax before interest is applied to your account.
If you aren’t a tax-payer tax will still automatically be deducted from your interest earnings so it’s important to fill in an R85 form and hand to your bank or building society – this will let them know you aren’t a tax-payer and you’ll receive gross interest from then on.
For those of us who pay tax, there’s only one way to avoid our interest-earnings being docked, and that’s by opening an ISA account. ISAs are tax-free savings accounts that allow you to save up to £5,100 in cash, so it’s certainly worth using up your annual tax-free allowance if you haven’t already.
Are your savings losing you money?
As exasperating as it may sound, your savings could in fact be losing you money if the rate of interest they’re earning is less than the rate of inflation. As such it’s important to check the rate of inflation regularly and make sure that your interest rate at the very least matches it.
Check the Bank of England website and look for ‘Current Inflation (CPI). Ideally, you want to be beating the rate of inflation to really make your savings work their hardest. If your rate of interest is less than that of inflation, your savings are losing value and so it’s important to move them to a new home right away.
As always when it comes to your savings, it’s important to keep an eye on what they’re earning so that when your rate becomes uncompetitive, you can move them to a provider paying a higher rate of interest – that way you’ll be able to ensure your savings are always working as hard as they can.
