How to make the most of your savings in 2012
The combined effects of low interest rates and high inflation are having a significant impact on the nation's savings, with the vast majority of savers losing money in real terms. It is not unusual to see savings accounts paying as little as 0.10% and some even offering only 0.01%. The average rate paid by an instant/easy access account for a £1,000 balance is currently 1.23% gross AER.
However, according to independent financial research company Defaqto there are a number of options people can consider to make the most of their savings.
David Black, Defaqto's Insight Analyst for Banking, outlines Defaqto's top ten tips for helping people review and manage their finances in 2012:
1. Use your ISA allowance
If you use each year's Cash ISA allowance you can build up a sizeable capital sum on which you can earn tax free interest. Interest rates paid on the full £5,340 balance in a Cash ISA range from 0.10% to 4.50% with an average rate of 2.54% gross AER.
The highest paying easy access Cash ISAs for a £5,340 balance are currently:
AA's Internet Access ISA issue 2 which pays 3.05% gross AER for £500+
ING Direct Cash ISA paying 3.00% for £1
Market Harborough Brighter ISA issue 9 paying 3.00% for £5,340
The highest paying fixed rate Cash ISAs for a £5,340 balance over different fixed rate periods are currently:
Governor Money's Bank Of Ireland UK 5 Year Fixed Rate Cash ISA which pays 4.50% for £100+
Halifax 4 Year ISA Saver paying 4.30% for £500+
Northern Rock 3 Year Fixed Rate e-ISA issue 30 paying 4.00% for £500+
BM Savings 2 Year Fixed Rate ISA paying 3.80% for £500+
Northern Rock 1 Year Fixed Rate e-ISA issue 28 paying 3.35% for £500+
Depending upon attitude to risk and investment timescale some people might prefer to use a stocks and shares ISA instead or as well.
2. Don't just stay with the same account
On a £1,000 balance the average instant/easy access account pays an interest rate of 1.23% gross AER but 94 accounts pay 0.10% or less.
However, there are accounts that pay significantly higher interest than this. The accounts which permit three or more withdrawals per year without penalty currently offering the highest interest rates are:
Coventry Building Society's Poppy Online Saver issue 2 paying 3.15% (including an introductory bonus) for £1+ but it limits withdrawals to four per year
Santander's eSaver issue 4 paying 3.10% (including an introductory bonus) for £1+
Manchester Building Society's Premier Instant issue 13 paying 3.06% for £1,000+ but it limits withdrawals to three per year
Shop around for the best deal and review your account regularly.
3. Take advantage of introductory bonuses
The average rate paid by instant/easy access accounts that have an introductory bonus is 2.16% which is 91% higher than the average rate of 1.13% paid by instant/easy access accounts that don't have an introductory bonus.
The accounts currently offering the most generous initial rates including an introductory bonus and permitting three or more withdrawals per year without penalty are the Coventry Building Society's Poppy Online Saver issue 2 and Santander's eSaver issue 4 accounts, mentioned above.
Take advantage of introductory bonuses but remember to review the account when the bonus ends.
4. Consider fixing your savings
Fixed rate bonds currently pay higher rates than variable rate accounts but remember that you won't benefit from any increase in general interest rates during the fixed rate term. For a £10,000 balance the rates paid by fixed rate bonds range from less than 1% to 4.70% with an average rate paid of 3.06%
The highest rate fixed rate bonds currently available for a balance of £10,000 or less for different fixed rate periods are:
Kent Reliance's 5 Year Fixed pays 4.70% for £1,000+
Halifax's Fixed Online Saver 4 Year pays 4.30% for £500+
Yorkshire Bank's 3 Year Term Deposit pays 4.30% for £2,000+
Yorkshire Bank's 2 Year Term Deposit pays 4.00% for £2,000+
AA's 1 Year Fixed Rate Bond pays 3.60% for £1+
Only deposit money into a fixed rate bond that you know you won't need for the fixed rate term because early withdrawals tend to be either expensive - in terms of interest penalty - or not permitted.
Some may find it useful to split funds between a fixed rate and a best buy easy access account.
5. Inflation-proof your savings
Inflation has been significantly higher than the bank base rate for quite a while but there are a number of bonds available that track one of the measures of inflation: the Retail Prices Index. If you want to ensure that your savings keep pace with inflation then you could consider one of these products - especially if it can be held as a Cash ISA - but do bear in mind that most economists are expecting inflation to fall in the short term.
Inflation linked bonds are currently offered by a number of institutions, including Barnsley Building Society, BM Savings, Chelsea Building Society, Legal & General, Santander, Tesco Bank and Yorkshire Building Society.
6. Consider an offset mortgage
If you have a reasonable level of savings and a mortgage then it might be worth considering an offset mortgage. With an offset mortgage you effectively earn tax free interest on your savings at the same rate as you pay on the mortgage. However, you don't actually receive the savings interest because it is offset against the interest that you pay on the mortgage.
Offset mortgages can be especially advantageous for higher rate taxpayers.
7. It is worth looking at current accounts that pay favourable rates on credit balance
If you're able to pay in at least £1,000 every month and are willing to switch your current account then it may be worth looking at current accounts that reward people for maintaining a certain level of money in their account. The accounts currently offering the most generous deals are:
Halifax's Reward Current Account will pay you £5 net of basic rate tax every month
Santander's Preferred Current Account pays 5% gross AER fixed for one year on credit balances up to £2,500
8. Pay off expensive debt
If you have outstanding debts then, if you are in a position to do so, think about using some of your savings to pay them off. The interest rates that are charged on store cards, credit cards, unsecured loans and overdrafts will generally be very much higher than you can earn on your savings account.
As we've shown above the highest paying fixed rate bond pays 4.70% whereas the average rate charged by a credit card is 18.8% APR.
9. Use your personal allowance
Everyone gets an annual personal allowance which means that you can earn a certain amount without paying any income tax. The basic Personal Allowance is currently £7,475 whereas those aged 65 to 74 have an allowance of £9,940 and it is £10,090 for those aged 75 or over.
If you're a non-taxpayer then make sure that you fill in the R85 form, that your bank or building society can provide, to enable you to receive gross interest.
10. Watch out for withdrawal restrictions
It is becoming increasingly common to find accounts that limit the number of withdrawals that are permitted - 18% (87 out of 475) of instant/easy access accounts limit the number of withdrawals permitted and with 2% (10) of accounts you will lose either a bonus or some interest if you make a withdrawal.
If you open one of these accounts then make sure that you won't transgress the number of withdrawals permitted because, if you do, then you won't get the headline interest rate cited.
Make sure that you're aware of, and happy with, any restrictive terms and conditions before you open an account.