HOW YOU CAN GET SHRIVELLED SAVINGS POTS GROWING
IT’S NOT A FERTILE TIME RIGHT NOW, BUT THERE ARE WAYS TO ENCOURAGE GREEN SHOOTS, SAYS HARVEY JONES
THE last decade has been a nightmare for savers, as rock bottom interest rates have meant miniscule returns from bank and building society pots.
Cash is no longer king, with the high street banks paying as little as 0.01% on some accounts, and there is little sign of a reprieve in the months ahead.
The rot set in after the financial crisis and the pandemic has made things worse, with the Bank of England cutting base rates to 0.1% during the first lockdown last March and that’s where they stand today.
With a little effort, you can get a higher return. So where should you put your savings now?
SAVE FOR A RAINY DAY
Financial advisers say everybody should have a pot of “rainy day” money for emergencies, such as illness, redundancy or a sudden expense, for example, car or boiler repairs.
The pandemic has highlighted the value of this, but many will struggle to build up their reserves as their earnings have been hammered by repeated lockdowns.
Others have built up their savings, putting aside a staggering £238 billion in 2020, official figures show.
Anna Bowes, founder of savings rate tracking service Savings Champion, said she hoped this trend would continue: “It would be great to think we are a nation of savers again.”
You should hold your rainy day money in an easy access savings account that you can withdraw if you need it in a hurry. Right now, Marcus by Goldman Sachs, Charter Savings Bank and Renault-owned RCI Bank all pay interest rates of 0.4%. These are horribly low by histori- cal standards, but the best you can get today.
Charter requires a minimum deposit of £5,000, but RCI’S Freedom Savings Account requires just £100, and Marcus just £1. Paragon, meanwhile, pays 0.41% on £1 and above.
Yorkshire Building Society’s Annual Access Account Issue 8 pays 0.45% on £100 and above, but restricts customers to just one withdrawal a year on the anniversary of opening the account, so may not work for your rainy day cash.
When comparing savings accounts, always look at the small print, says Andrew Hagger, founder of personal finance research company Moneycomms: “The best savings rates are typically only available online, so you may have to hunt harder if you want a postal or branch-based account.”
Remember that savings rates on easy access accounts are typically variable, so can be cut at any time.
CURRENT ACCOUNT INTEREST
You could get a much higher return, by switching your everyday banking to a current account that pays interest on your balance.
Right now the Virgin Money M Plus Account and the Flexdirect Account from Nationwide are leading the way by paying 2%.
The downside is that Virgin only pays interest on balances up to £1,000, giving a maximum of £20 a year, while Nationwide pays up to £1,500, or a max £30. Even worse, Nationwide’s rate reverts to just 0.25% after 12 months, which would give you just £3.75 a year.
Club Lloyds Current Account pays just 0.60% on balances up to £4,000, then 1.5% on any part of the balance between £4,000 and £5,000. In total, this is worth a maximum £39 a year.
The Santander 123 account has been popular, although in line with most accounts, the benefits have been slowly whittled away.
Today it pays 0.3% on balances up to £20,000, worth £60 a year. In return, you have to pay a monthly account fee of £4, costing you £48 a year. As always, the small print gives and then takes away. Santander 123 does offer other benefits, notably 3% cashback on selected household bills, capped at £5 a month.
Again, check terms and conditions on all accounts. Typically, you’ll have to move your everyday banking over, including two direct debits, and pay in between £500 and £1,500 a month.
FIX FOR A HIGHER RETURN
You can get a higher return, if you are willing to lock your money away for a set period in a fixed-rate bond. The longer you are willing (and able) to tie up your money, the more interest you will receive in return.
So today, you can get 0.63% from Shawbrook Bank’s one-year, fixedrate bond, or 0.96% from its threeyear bond.
If you can lock your money away for five years, Hodge currently pays 1.35%, closely followed by Shawbrook at 1.31%, and Zopa at 1.27%.
Oxbury’s 95-day notice Account pays 0.52%, while Charter’s 60-day notice account pays 0.46%.
CHECK YOUR TAX POSITION
ONE piece of good news is that most people do not pay tax on their savings interest anymore. Under the personal savings allowance, basic rate 20% taxpayers can earn up to £1,000 a year in interest before paying tax.
You would need a thumping £200,000 in a savings account paying 0.5% a year, before facing a tax bill.
Higher-rate 40% taxpayers can earn up to £500 a year in tax-free interest.
The personal savings allowance has reduced the appeal of saving inside a tax-free cash Isa, where all your returns are free of interest for life.
Andrew Hagger says it is still worth considering cash Isas, because if interest rates recover more people may exceed their personal savings allowance.
“That day seems a long way off at the moment though,” he adds.
You can invest up to £20,000 in an Isa this tax year, either in cash or stocks and shares, or a combination of the two.
Kent Reliance’s cash Isa pays a variable rate of 0.45% on a minimum £1,000 and is available in branch, online or by post. Paragon pays 0.41% and Marcus 0.40%, both on £1 and above.
You can also get fixed-rate cash Isas, with Shawbrook paying 0.47% over one year, 0.71% over three years and 1.10% over five years.
MAKE SURE YOUR CASH IS PROTECTED
Most savings accounts are backed by the Financial Services Compensation Scheme (FSCS), which covers the first £85,000, or £170,000 for joint accounts.
That way you should not be out of pocket if your bank goes bust.
It means your money is just as safe with an unknown so-called challenger bank as one of the big high street names, provided it has FSCS protection. Always check first and spread bigger balances around to reduce the risk.
That £85,000 is per banking licence. For example HSBC and subsidiary First Direct share a banking licence and are treated as the same entity. Always check.
DON’T FORGET THE KIDS
Setting up a savings account for your children is a great way of teaching them the value of money. They also get higher interest rates. The Halifax Kids’ Monthly Saver, for example, pays 3.50%, as does the Barclays Children’s Regular Saver. There is no minimum age to open, but the maximum is 15 years old.
Alternatively, you can save up to £9,000 this financial year in a tax-free Junior ISA, either in cash or stocks and shares. Local building societies tend to offer the best rates in this area, with Bath, Darlington and Dudley leading the field paying up to 2.5%. That money will belong wholly to your child when they turn 18, so make sure you instil in them a grown-up attitude to spending!
The best savings rates are typically only available online Andrew Hagger of Moneycomms
KEEP ON EYE ON THE MARKET
Savings rates change all the time, with old accounts being closed to new business, and new ones launched in their place. Damien Fahy, founder of Moneytothemasses.com, says banks and building societies typically reserve their best rates to attract new business.
“This means that existing savers with legacy accounts often get a much lower return,” he elaborates. “Shopping around regularly is essential.”
Before switching to a new account it’s also advisable to check that there are no exit penalties on your existing one. These are typically charged on fixed-rate bonds and notice accounts.