Can you still get a decent return on your savings?

Interest rates are at rock bottom after the Bank of England slashed them in response to the coronavirus pandemic. This means it’s a lot harder to find a decent interest rate, and almost impossible to find one that beats the current rate of inflation. Yet there are options, and it might be time to explore something a little different, such as a stocks and shares ISA or investing in peer-to-peer lending. Here we look at the different options available to find the best interest rate possible for your cash.

Where to start

If you have savings, find out what interest rate you are getting by contacting your bank or building society or by checking your account statement. Chances are, you could get more, especially if you haven’t looked at it in a while.

Even the smallest increase in your interest rate can make a difference, especially if you have a large amount of money saved up.

If you are just starting to save you should still look around for the best rates possible.

Inflation-proof your savings

After tax, your savings rate must be higher than the rate of inflation, also known as the Consumer Prices Index (CPI), for your money to actually be growing.

The CPI is calculated by averaging the price of consumer goods and services.

If the CPI increases, the cost of consumer goods and services rises too, so if your savings interest is lower, your money depreciates in value. At times of high inflation, such as in the current economic climate, it can be hard to find interest rates that beat inflation. But any interest rate is better than none.

What to look for

There are lots of different types of savings accounts, and choosing the right one can help you boost the interest you earn.

• Instant access accounts: These usually pay the lowest interest rate, like 0.1%, but you can withdraw and add money whenever you want. If you need access to your money, these are a good choice but if you want to make a decent return, try and avoid these accounts.

• Notice accounts: These can offer a slightly higher interest rate than instant access, but you need to give notice to make a withdrawal, usually up to 120 days, or face an interest charge.

• Regular savings: These can offer the highest interest rate of any savings account, but there is usually a limit to how much you can pay in each month. Some even restrict you from withdrawing in the first 12 months.

• Fixed-term accounts and bonds: These tie your money up for a set term, of up to five years. You usually won’t be able to access your money within this term without paying a penalty.

• Cash ISAs: These are tax-free versions of the savings accounts above, but you could earn up to £1,000 in interest before tax from any savings accounts each year, making these accounts less competitive.

• High-interest current accounts: These can offer higher interest rates than savings accounts. However, they usually set a limit on how much you can earn interest on, for example, £2,500.

Although interest rates are low at the moment, think about the access you want to your money. Usually, the more restrictive the account is, the more you could earn in interest.

Find out which savings account to choose here

The best alternatives to savings accounts 

There are various ways you can invest your savings, even if you do not want to tie your money up for five or six years. You could try your hand at investing.

There’s no guarantee you’ll earn more, and you could lose everything you put in.

Here are some of your options and where to find more information:

Peer to peer

• Crowdfunding: You usually get a high-interest rate, and your money is loaned out to people or businesses and repaid over the term and interest rate you choose.

• Innovative Finance ISA (IFISA): This is the same as crowdfunding, but you can use your ISA allowance to make any interest you earn tax-free.

Share dealing

You can use a share dealing platform to buy and sell shares in listed companies.

However, it’s worth remembering that the value of shares can fluctuate and go down as well as up.

Portfolio investments

You could get help from a financial adviser to help you build a collection of investments in one portfolio. These collective investments come in several types:

• Unit trusts

• OEICs

• Investment trusts

You may have to pay an adviser to help you create or manage these investment types. Any type of investment has a level of risk and you’ll also need to be able to put money away for a longer term than with a savings account, and risk losing it altogether in some circumstances.