Your Savings - Where to Start

Everything you need to know about making your savings work hard.

Updated on 10 June 2015.

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If you've been squirreling money away into a bog standard savings account for years you could well be missing out on valuable interest. We explain how you can boost the return on your savings simply by prioritising where you stash your hard earned cash.

Deal with your debts

More often than not the interest you pay on your debts greatly outweighs that which accumulates on your savings. (i.e. paying 15.9% APR on your credit card borrowing and earning 5% net on your savings). For this reason, although it may sound a little 'alternative', using your savings to pay off your debts is often incredibly profitable. So, if you currently have any outstanding borrowing, be it secured or unsecured, its always worth looking into this option before starting to save.

Cash ISAs

For UK tax payers the most profitable savings account available is a Cash ISA. These work in the same way as normal bank and building society savings accounts but are completely tax free. This means that you get to keep every single penny of the interest earned on your money, whereas in normal saving accounts its taxed at a rate of 20% (40% or 50% for higher rate tax payers).

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Maximise the value of your savings by hunting down the best rates available, compare savings accounts to find the best fit for your money.
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You are allocated a 15,000 ISA allowance this financial year, and following rule changes on 1st July, 2014, your full allowance can now be saved as cash.

It's well worth taking up as much of this allowance as possible because it really is the most profitable cash based investment for your money. What's more if you don't use your ISA allowance, you lose it.

Regular savers

It's become a bit of a trend for banks to offer spectacularly high interest paying regular save accounts and once you've maxed out your ISA allowance each year it really pays to take advantage of these benefits.

While regular savers do tend to offer the best returns after cash ISAs (tax will be deducted from interest earned unless you are exempt), they do have their catches so it always pays to read up on the terms and conditions before you start.

Regular savers tend to be fairly inflexible about how much you are able to pay in to your account each month, often capping the maximum and minimum limits fairly tightly. Additionally many also limit the numbers of withdrawals you can make during the elevated rate period so it really pays to read up on the terms and conditions before you start.

The best way to use these accounts it to drip feed money by standing order from your standard savings account as your existing savings will then benefit from the higher interest rates.

There is no limit to the number of regular saving accounts you can open so if you have a fairly substantial amount in savings it might be worth opening several. However, do make sure you keep an eye out for the rate expiry date so you can move your money once the account stops being profitable.

Standard savings accounts

If you are looking for a place to store your extra cash once you've used your ISA allowance and are making the most of best buy regular savers, a flexible high interest paying savings account is where the rest of your money should live.

Its important you choose an account that offers a post-bonus interest rate that at least matches the Bank of England base rate after tax as this will keep your money growing in value.

Any interest you earn on your savings (with the exception of funds kept in an ISA) will be subject to tax so its important to make the most of any tax efficient saving opportunities that are available to you - visit our saving on your savings guide for more information.

What does AER mean?

AER stands for Annual Equivalent Rate. It shows you how much interest you would earn if you left your savings in an account to accumulate a year's worth of interest.

As money will accumulate a certain amount of interest every month it is left in an account, over the course of a year you end up earning interest on top of that interest. This is known as compound interest. The figure quoted as 'AER' on a savings account is calculated from the rate of interest earned over a year, including this compounded interest.

What's the difference between the AER and the advertised rate?

Some savings accounts allow you to choose how often to have your interest paid - monthly, quarterly, or annually. The AER will be the same whichever option you choose, but the advertised rate (which doesn't take into account compounding) will be lower the more frequently interest is paid.

For example, if you had an account with an AER of 3%, its advertised rate for interest paid annually would also be 3%, but for interest paid monthly this would be more like 2.8%.

What is gross interest?

The gross interest rate on your savings, just as anything else in the financial world labelled gross, simply means the amount you would get before tax is deducted.

For most UK taxpayers tax is deducted automatically from interest earned, before it is even added to your balance, as it counts as a form of income. Therefore most of us will see 'net interest' noted on our statements instead of a gross amount.

Final tips

By far the easiest way to compare savings accounts is by using best buy tables as these detail all the basic information you need to decide whether an account is right for you. Its best to keep an eye on these tables so that you can check that your money is still in the most profitable place. Use our savings account comparison tables to find the market leading savings accounts.

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Compare Savings Rates
Maximise the value of your savings by hunting down the best rates available, compare savings accounts to find the best fit for your money.
Compare Savings Rates

Further reading...

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What is your new tax-free personal savings allowance?

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