How to find the best home for your savings
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:
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.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
A current account that charges a monthly fee in return for a “package” of additional services, such as travel insurance, credit card protection, mobile phone insurance, identity theft insurance, car breakdown cover or a “concierge service” that will book airline and theatre tickets or restaurant tables. However, many consumer experts say the features are overpriced and that more competitive deals exist elsewhere in the market and that very few packaged account holders actually take advantage of the features.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.