Get your savings out of the slow lane


In 2008, interest rates of 5% to 6% on savings accounts were pretty standard, and there were even accounts, such as Halifax’s regular savings account, which paid a spectacular double-digit 10% interest.

But those heady days are long gone, and statistics from the Bank of England reveal that the average interest rate for an instant access savings account was a mere 0.19% at the end of March 2009 compared with 2.86% in October 2007, while the average interest on cash individual savings accounts has dropped from 5.32% to 0.63% during the same period.

Although you can’t do much about falling rates, knowing your options and refusing to simply settle for your existing savings account will at least help you make the best of the current situation.


Your annual £3,600 cash ISA allowance should always be your first port of call. Unfortunately, poor interest rates mean fewer people are automatically topping up their ISAs or opening new ones. According to the Co-operative Bank, 13% more people will forego their ISA allowance this year compared with last year.

“There are still good deals out there,” says David Black, principal consultant for banking at Defaqto. “You can generally transfer funds, so it’s still worth using your allowance, in anticipation of the time when rates get higher again.”

The tax-free status provided by ISAs means that even with a low rate of interest they are still worthwhile. Basic-rate taxpayers save 20% on the interest they earn, while higher-rate taxpayers save 40%.

“If you’re thinking ‘I have to put money into something that’s safe’, you can’t ignore ISAs. Even if you’ve only got £3,600 in an ISA and you get just 1% interest, that’s still 1% gross as opposed to 0.8% net if you’re a basic-rate taxpayer and have your money in a deposit account,” says Bob Perkins, an independent financial adviser at Origen Financial Services.

Fixed-rate accounts

Once you’ve used up your annual ISA limit, if you have a chunk of money that you know you can do without for a year or two, then you could opt for a fixed-rate bond. Those who put their money into a fixed-rate bond a couple of years ago – or even a year ago – will have benefited from locking into a higher interest rate.

Even today, despite interest rates being low, fixed-rate bonds tend to offer some of the more attractive interest rates for savers. However, the amount you have to put away - and how long you are prepared to lock it your money away for - will determine the rate of interest you earn.

Opting for a fixed interest rate at the moment - when the Bank of England base rate is so low - might not be the wisest move, as rates on new accounts could improve later in the year.

“Fixed-rate accounts are a good idea, but the downside is that you’re still not looking at a brilliant rate; if interest rates go up you’ll be saddled with the same relatively low rate,” explains Perkins.

Also, if your circumstances suddenly change, you won’t be able to access your money or, in the rare cases where it’s possible, you’ll incur a heavy penalty. Some accounts don’t allow any early access to the money unless the account holder dies or is declared bankrupt.

Regular savings accounts

If you haven’t got a large deposit, but are still happy to put your money away for a set period of time, try a regular savings account. They offer some of the better interest rates on the savings market, and while you often have to lock your money away for a year, you can pay in as little as £10 a month.

You can withdraw money from a regular savings account, but if you do so you’ll receive a lower level of interest. Some accounts also have a limit on the amount of money you can put away each tax.

However, despite the restrictions, monthly savings deals are a great way to develop a regular savings habit and allow you to slowly build up a pot of money without having to lock away a large amount all in one go. If you set up a standing order straight after pay-day, then you shouldn't miss the money too much.

Notice accounts

Notice accounts are also helpful if you want to train yourself into healthier saving habits. “If you’re one of those people who is liable to go out and spend all your money, then notice accounts have an advantage,” says Black.

Savers usually need to give 90 days’ notice to withdraw money from a notice account, so opting for one of these is less of a long-term tie than a fixed-rate bond, and the required deposits are lower too. But of course the interest rates are not fixed.

However, there’s no point choosing a notice account if you then need to withdraw money before the notice period, as you will end up losing the ‘extra’ interest. So if you need to dip into your savings, an instant access account makes more sense.

Traditionally, because of their lower interest rates, instant-access accounts have been overshadowed by notice accounts. But the current economic uncertainty means instant-access accounts are more popular as most people prefer to be able to reach their money.

Lately, the gap between the rates offered for instant-access and for notice accounts has also narrowed. “There’s no real incentive to go for a notice account – as a general rule there’s not a lot of difference between them,” says Black.

Most rates usually last a year 
and then drop significantly, so only go for these accounts if you’re willing to switch to another account once your bonus rate has come to an end. “Take advantage of the offers but know when it’s time to jump ship, as banks tend to rely on the inertia of their customers,” recommends Black.

Make a note of when the rate ends – and also check the terms and conditions as some providers only allow three withdrawals in a year or you lose the bonus.


Chopping and changing isn’t for everyone though, and you might do better to look for consistency over headline rates. Moneyfacts’ savings consistency survey looks at the performance of savings accounts over the last 18 months and three years to give customers an idea of the bigger picture.

“With so many changes to rates going on in the market, it’s difficult to know where to move your money to,” says Michelle Slade, an analyst at Moneyfacts. “An account that tops the best buys one minute may see its rate greatly reduced the next.”

Nearly four in five of the most consistent accounts in the survey are offered by building societies. Principality Building Society, for example, manages to get three of its products in the consistency tables over the last 18 months.

“They may not be the best buy rates, but had you left your money with them for 18 or 36 months, you would have achieved the best rate of return,” says Slade.

If you’re still looking for a good rate, you could get a better one by opening a savings account at the same bank you hold your current account with.

Offset mortgages

Finally, if you’re a homeowner and have a chunk of savings to put away, why not consider an offset mortgage?

The way offsetting works is that your savings account and mortgage are combined so that the savings are deducted from the amount you owe on your home. You will then only be charged interest on the difference. “If you have £2,000 in savings and an £80,000 mortgage, your total mortgage is £78,000,” Perkins explains.

Basically, you are paying less interest on your mortgage, so even though your savings aren’t earning interest, the old premise of clearing debt before savings rings true.

Higher-rate taxpayers will also benefit because the usual 40% wipeout on their accrued interest in a savings account doesn’t apply with an offset scheme. So, if you have already used up your ISA allowance, this could be a good option for you.

“You need a reasonable level of savings, so these are great for higher-rate taxpayers and 
buy-to-let landlords,” says Black.

Remember, however, whatever type of savings account you choose, only £50,000 of your money with any one provider is protected by the Financial Services Compensation Scheme. If you have larger sums than that, make sure you spread your savings out.


More about