Many savers breathed a sigh of relief in August when, for the second time in 10 years, the Bank of England raised interest rates indicating the beginning of the end of what many call a ‘lost decade’ of paltry returns on their money.
However, most banks aren’t passing on this increase as it is estimated that less than a third of variable-rate savings accounts saw a rise.
So how can you get the best return on your savings?
The rates do vary from bank to bank, but at present HSBC’s Flexible Saver account offers just 0.15% – which means that if you invest £10,000, you’ll only earn £15 over a year.
In stark contrast, Marcus by Goldman Sachs, which launched very recently is paying a much better rate of 1.50% on the easy-access Online Saver Account. So again, working it out on a savings amount of £10,000 the account will provide interest of £150 over 12 months which is 10 times the amount offered by HSBC.
The waiting game
If you are willing to wait, you will get a much better savings rate. However, many savers are turned off by suggestions from the Bank of England that rates will increase more in the coming years and savers don’t want to tied in.
If you don’t mind giving notice to withdraw the money, there are better deals to be had from high street lenders. Paragon is offering an account at present with a 120 day notice period with an interest rate of 1.8%.
If you are willing to fix your rate for 12 months or over, you’ll do even better. At present BLME is paying 2.05% on a 12-month minimum term account, although it’s worth noting that this is a sharia account, so the return is an expected profit rate rather than a guaranteed interest rate.
If you are willing to stretch to a five year saver account, Swedish bank Ikano (offering protection under the Swedish Compensation Scheme on balances of up to £85,000) is paying 2.7% gross/AER on its saving account.
Make sure you are aware of terms and conditions, and if you do fix your savings account for more than twelve months be sure that you won’t need access to the funds beforehand. With good rates come restrictions. Some of the best easy-access accounts are either accompanied by a bonus or a limit to the number of withdrawals a saver can make so make sure you read the terms and conditions carefully.
Are cash Isas an option?
Because of the sharp decline in the amount invested in cash Isas due to low interest rates, changes to tax rules mean the first £1,000 of interest that an individual receives from savings is now tax-free if they are a basic-rate taxpayer. However, it could be worth considering as you it could spare you a future tax bill if your savings grow, or you earn more than the tax-free threshold. The more you are earning and saving, the greater the argument for sticking with Isas – but it’s important that you shop around for the best rates and switch when they slide
If you are happy to tie up your money for up to 10 years, you could consider a stocks and shares Isa and can start with as little as £25 a month and save from there.