How to find the best home for your savings

Piggy bank gamble

Many savings providers are not telling customers when they cut the interest rates on their accounts, recent research by Which? has revealed.

Only four out of the 12 banks and building societies surveyed by the consumer champion guarantee to get in touch with customers to inform them of changes to their rates.

The survey highlights once again the importance of reviewing your savings accounts, and transferring your money if necessary.

The problem is, it's becoming increasingly difficult to beat inflation (currently sitting at 5% according to the Retail Price Index).  

So it’s up to you to make sure your savings aren’t languishing in an account that pays little or
no interest. 

The Monetary Policy Committee’s decision to keep the Bank of England base rate at 0.5% (it has now been at this level for 18 consecutive months) is bad news for savers. “You’ve got accounts paying 0.1%. Three or four years ago you’d have thought nothing of an interest rate being 0.4 points below the base rate, but that’s because back in July 2005 the base rate was 4.75%,” explains David Black, banking specialist for data provider Defaqto. 

Eventually, the base rate will have to rise again, but when is anyone’s guess, and it’s unlikely to make a significant leap. As Black says: “I’d be very surprised if it’s radically different at the end of the year.”

In the mean time here are five ways to make the most of your savings:

Be pro-active 

Keep a lookout for the most competitive rates. Interest rates on fixed-rated bonds range from 2% to 4.75%, but be aware of when the terms on your fixed-rate accounts come to an end and find new accounts to move your money into.  

Questions to ask yourself

Think about how happy you are to take a little risk. Do you think you might need instant access to the money? If you can, try to put it away for a fixed period as this will usually get you a better rate.

Are you happy to invest in stocks and shares, or would you be scuppered if your investment fell in value? It's generally accepted you should have a secure rainy day fund before you look to invest your money, even if the returns are potentially much better.

Use your ISA

The annual cash ISA allowance is £5,100 (for tax year 2010/11) and savings on this are tax-free, so look to use it before other types of savings accounts. Beware of headline grabbing rates, however, which often include a bonus rate that runs out after 12 months. 

Banks won't always make it easy for you to transfer ISAs and some of the best accounts available won't accept transfers. But last month the Office of Fair Trading ruled that ISA transfers should take a maximum of 15 days to complete, so the banks should be cleaning up their act.

Linked accounts 

It’s also worth considering moving your current account. There are current accounts paying extremely attractive interest rates, but the conditions and restrictions may temper the attraction of some of the glorious rates on offer, and the decision to switch shouldn’t be based on the interest rate alone.
For example, Santander promises to pay 5% interest on balances, but only for the first 12 months and on the proviso that the account holder pays in at least £1,000 a month and doesn’t exceed the overall balance limit of £2,500. 
Savers with Halifax can boost their savings rate by 0.2%, on variable rate accounts, but again on condition that they pay £1,000 into a current account. 
Meanwhile, HSBC customers could get up to 8% interest in a regular saver account, but this is only available to customers who pay for one of HSBC’s more expensive packaged accounts such as its Premier, Advance, Graduate (Advance) or Passport accounts. 
Offset mortgages
Perhaps a better place to put your savings if you are a homeowner – and in particular a higher-rate taxpayer – is against an offset mortgage.
This product sets against your mortgage any savings you have with the same institution, so that you only pay interest on the remaining amount. “The advantage is that your money effectively works for you tax-free, which is a great idea for higher-rate taxpayers,” says Black. 
For example, if you take out a £100,000 offset mortgage at a rate of 2.74%, while holding £20,000 in a linked savings account, you would only pay interest on the remaining £80,000. This would save you more than £14,000 in interest and wipe five years off the mortgage term. 
When considering an offset mortgage, look beyond the cheapest rates to see what other features are included, such as flexible payment options, access to savings at any time, or the ability to link to multiple accounts. Alternatively, check with your provider to see if you can make ad hoc or regular overpayments.