Easy ways to boost your savings
1. Use your ISA allowance
The cash ISA limit for 2013/14 is £5,760. Any savings put into a cash ISA are exempt from tax, which means you'll receive all the interest you earn. The average ISA interest rate is 1.85% AER - but you can earn considerably more or less depending on how long you want to tie your money away for.
2. Build up emergency savings
Before you lock your money away in a higher-paying fixed-rate account, build up at least three to six months worth of salary in an easy access account. This way, you'll have money you can get to easily in case of an emergency.
3. Loyalty doesn't pay
Bonus rates often beef up interest rates but once they come to an end your savings rate could be dropping to next to nothing.
For example, Nationwide's Easy Saver ISA, which pays 2.25% for the first year, drops to 0.5% after that.
Keep a note of when bonus rates end so you can move your money to a better account.
4. Inflation-proof your savings
There are no inflation-linked bonds that link to the retail prices index (RPI) - the other measure of inflation that includes housing costs. But Virgin Money, Dudley Building Society and Newcastle Building Society are among those with inflation-busting fixed-rate bonds.
5. Consider an offset mortgage
If you've got a mortgage and a reasonable level of savings it may be worth considering an offset mortgage. Your savings are offset against your mortgage debt, therefore reducing the sum of money that you owe interest on.
For example, if you had £15,000 worth of savings and offset this against a 25-year £150,000 repayment mortgage, charging 3.5%, you would save £18,690 in interest and repay the mortgage one year, 11 months early.
6. Got a lump sum? Fix!
If you've got a spare stash of cash it could be worth securing it in a fixed-rate account. These accounts offer better interest than variable-rate accounts.
However, many require a large deposit. Of course you won't benefit from any interest rate rises but they are also a good way of locking away money that you don't want to be tempted to touch.
7. Little and often
Not all of us are fortunate enough to have large deposits we need to offload but even if you can only save a minimal amount, saving on a regular basis will get you in the mindset of saving.
8. Watch out for penalties
Some accounts have limits on the number of withdrawals you can make, while others will penalise savers for making withdrawals with a loss in interest.
9. Look out for capped interest
Some accounts will only pay the headline interest rate if a saver deposits enough money into the account each month. Take Aldermore's notice savings accounts: savers must keep at least £1,000 in their accounts at any time to benefit from the higher interest - failure to do so will see the interest drop to 0.5%.
10. Take advantage of preferential rates
Current account holders may be able to benefit from higher interest rates on their savings. HSBC pay their current account customers 8% interest with their regular savings accounts. Only HSBC customers with paid-for packaged accounts can take advantage of the 8% rate, however.
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.
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.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
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.
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.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
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).
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.