Three ways to get the best returns from your savings
1. CASH ISAS
Cash ISAs are a good first stop. Rates can be slightly higher than on comparable savings accounts but the main benefit is their tax-free status.
With no tax to pay, basic-rate taxpayers get 25% more interest than in an equivalent taxable account, while higher-rate taxpayers get 66% more.
2. SPECIAL DEALS
Once you've used up your ISA allowance, look for special deals. Some banks offer enhanced rate savings products if you're a current account customer, or you could pick an account with an interest rate enhancing bonus. With the latter though, keep an eye out for when the deals end as the rate can shrivel.
3. OFFSET MORTGAGES
An offset mortgage can also be a good home for your savings. Although you won't receive any interest, your savings will be used to reduce the size of your debt.
Effectively, this means they earn tax-free interest at your mortgage rate. Evolve Financial Planning's Jason Witcombe endorses this debt reduction strategy.
"How effective it is will depend on the interest rate on the mortgage," he says. "If you're lucky enough to have a low rate you may still be better off with a separate savings product. Do the maths, and always consider paying down debt of any sort if the interest rate on it is higher than you'd achieve through a savings product."
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.
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.
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.