With interest rates at their lowest level on record, it’s not easy to find any half decent savings deals on the savings market, and savers are finding it tough to get any modest returns.
Higher-rate tax payers have been hit hard as a result of the National Savings and Investment’s withdrawing its tax-free index-linked certificates, as it was previously offering the equivalent taxable gross return of 10% providing that the current Retail Prices Index (RPI) rate stayed at 5%, giving savers more than double the returns that any standard savings accounts can offer.
An NS&I spokesman recently told the BBC Radio 4’s Money Box programme that another issue of index-linked certificate would be launched this year. However he denied that NS&I had any plans for future issues to track the generally lower Consumer Prices Index (CPI) instead of the RPI.
The Bank of England base rate has remained at its record low of 0.5% for more than 16 months now – and one economic forecasting group said it expects the rate to stay at this level until 2014 – which means most savings accounts are now actually losing money in real terms based on RPI inflation.
Some shares offer high dividend yields and those looking to invest small amounts can protect their returns from income tax by making use of their stocks and shares ISA allowance. However, there is no guarantee that you will earn any returns from shares, so there are risks involved, as we all know that share prices can increase and decrease depending on business performance.
If you have a savings account, check that you are getting a competitive rate. You may have initially opened it with an attractive rate, but most savings accounts offer introductory bonus rates that are valid for 12 months. After this period the rate paid on your funds can be significantly lower, so it’s important to keep an eye on your account and keep it competitive. (Find out more in our guide to Savings and Bonus Rates.)
Also, rates tend to fluctuate based on the Bank of England rate, so once this begins to rise you should keep a close eye on the savings market. If you find you could be earning more, switch account – it’s much easier than you may think and banks are set up to welcome new customers so it is in their best interest to make the switch-over as smooth as possible.
If you’re looking for the best interest rates around and you’re happy to save in an account that reduces access by lowering of stopping withdrawals all together for a fixed period of time, you might wish to consider fixed rate bonds. These savings accounts allow you to fix a rate for an extended period of time (usually between 1 and 5 years) while fixing the period of time you effectively lose access funds. Leaving your funds untouched not only allows you to earn some great returns, but also gives give you more of an incentive to leave your savings to grow, while protecting them from being eroded by inflation.
If you require access to your funds due to unforeseen circumstances you can withdraw funds, however you will lose some or all of the interest.
The highest paying bond in our tables is currently the ICICI fixed rate bond, currently offering 4.75% on all funds from £1,000 with no maximum. However this account requires you to leave your funds untouched for a 5 year period, so if this sounds like a long time to you, you can opt for a shorter term with a lower rate.
Although the UK banking crisis has settled down now, you should still spread your savings around to ensure they are 100% protected – never invest more than £50,000 (the limit covered by the Financial Services Compensation Scheme) with a single provider or financial institution, and be sure to check multiple banks do not fall under the same financial umbrella, as you may find that your group chosen banks only offer a single protection allowance between them.
If you really want to be clever about it you would be better to work to a limit of around £48,000 as this will allow any interest you earn to also be covered if your bank were to fail.