Will 2011 be a better year for savers?

Check out the top rates to kickstart your New Year saving habit

Let's not beat around the bush - 2011 is going to be a critical year in more ways than one.

Will the UK economy slide back into recession as the government's spending cuts start to bite? Will unemployment continue to rise? Or will the economy, buoyed by low interest rates, surprise us all by growing beyond our - and forecasters' - wildest predictions? Of course, I hope it is the latter.

The year 2011 is also a critical one for savers - and the savings habit in general. Will 2011 finally see a renaissance in the savings spirit as savers are given a fairer deal from the government and financial institutions? Or will savers continue to suffer as David Cameron and his posse attempt to keep the economy on an even keel?

Of course, I hope it is the former - given that for every mortgage borrower, there are some seven savers. But I wouldn't count on it, given the Bank of England's current loathing of savers and saving in general (it wants everyone to spend, to keep the economy out of recession).

Keep up to date with the best savings rates

The financial crisis has truly dealt deposit savers a cruel hand. One of the prices paid for saving the banks has been a base rate set at 0.5% since April 2009. For those savers reliant on monthly income from their deposits to top up their income (essentially pensioners), this rate has been a disaster.

Most cash savers - even those 'rate tarts' who chase best rates - have had no choice but to stand and watch the real value of their savings pots slowly wither on the vine.

Maintaining the value of those savings for basic and higher-rate taxpayers requires rates of 4% and 5% respectively, but such accounts are few and far between. So this has to be the year when cash savers extract the maximum interest from providers.

A few simple rules will help you along the way

First, use your cash ISA allowance (£5,100 in the tax year ending 5 April 2011) to generate tax-free income.

Read our round-up of the best cash ISA rates

Secondly, ensure you are utilising your personal tax allowances efficiently for savings purposes - especially if one of you is a non-taxpayer and can have savings income paid gross.

Thirdly, be prepared to change accounts if you can get a better deal elsewhere.

Fourthly and finally, spread your money around so that your savings enjoy the financial security of the Financial Services Compensation Scheme. The safety net per institution has increased from £50,000 to £84,000 (equivalent to €100,000). Don't put more than this sum in any one institution or group.

For savers happy to take on more risk, the virtues of equity income unit trusts or investment trusts cannot be overlooked - especially if these funds are held inside a tax-friendly individual savings account.

They can be held either as a complement to a cash ISA, subject to an annual cap of £5,100, or as an alternative, in which case the annual limit is £10,200. Some income-oriented investment trusts have more than 20 years of delivering investors a growing dividend, including the likes of Alliance, City of London and Witan. They should not be ignored.

Two further developments should help the savings habit in 2011. First will be the 'soft' spring launch of the National Employment Savings Trust (Nest) - a pensions vehicle designed to encourage more people, especially the low-paid, to save for retirement. This will be accompanied in 2013 by the auto-enrolment of most workers into works pensions or Nest.

Secondly, autumn will bring in a Junior ISA for children - a replacement for the axed child trust fund.

Let's hope 2011 brings savers a little more joy than the last couple of years. By Jove, they deserve it.

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Your Comments

Of course encouraging people to save is very difficult with the low interest rates. NEST will need to be very convincing and at the present rates, few will bother to save. The Government's decision to cut pensions in real terms by 8% will also impact on the saving for pensions issue. Overall I fear that recapturing the saving habit is going to be very difficult when grandparents (traditionally the save for arainy day people) admit how successive Governments have treated them. Thatcher with the link to RPI not earnings, Brown with his 5 billion a year pension raid and now Osborne with his switch from RPI to CPI. Why save? No idea, sheer stupidity perhaps?