Life hasn’t been easy for savers looking for high interest accounts over the last few years. But the difference between the best and the worst savings accounts is still significant.
And New Individual Savings Account (NISA) rules, which allow you to shelter up to £15,000 from the taxman in cash, are a godsend – as you get to keep every penny of the interest you earn.
Here’s our guide to the best high interest accounts that you can use to grow your savings pot.
Cash New ISAs (NISAs)
If you are a UK taxpayer, you have to pay income tax on interest earned from your savings in line with your usual rate – which means losing say, 20% or 40% of your return.
But, as cash NISAs allow you to earn interest tax-free, it always makes sense to max out your NISA allowance before stashing money into a standard savings account.
Since July 1, 2014 you have been able to shelter a generous £15,000 from income tax in a NISA. You can also now choose to hold all of this allowance in cash – which is almost three times the £5,940 you could shelter in a cash ISA before July 1.
So long as you do not physically withdraw your money from your cash NISA, you can keep this year’s tax breaks and build on them next tax year (2015/2016) when you’ll be given a fresh new allowance. (However, you won’t be able to roll over your tax-free allowance into the next year if you don’t use it in this one).
These tax breaks mean it’s sensible to use as much of your NISA allowance as you can, even if you can find higher rates on non-NISA accounts.
The exception to the rule is if you are a non-taxpayer, in which case saving through a NISA offers no benefit.
The difference between the best and the worst savings accounts is significant
If you have already used up your NISA allowance, you might think a standard savings account is the next best place for your nest egg.
But these days, the best interest rates can actually be found on some current accounts. Some pay up to 5.00% on smaller balances of a couple of thousand, or 3.00% on balances of up to £20,000.
You usually have to switch your current account completely to benefit from these deals, but the introduction of the Current Account Switch Service in September 2013, means the process is now hassle-free and can be carried out in seven working days.
Easy access accounts
Also known as no-notice accounts, easy access deals give you instant access to your cash whenever you want it. That makes them a great home for emergency cash that you can call on to pay for a broken boiler or car repairs, for example.
The bad news is that interest rates on easy access accounts are generally pretty low – particularly if you don’t shop around for the best deal.
Better-than-average rates are usually reserved for internet-only accounts, while some employ introductory bonuses to boost the advertised rate – but which run out after the first 12 month.
Even if there isn’t a bonus, rates tend to be variable so keep a close eye on what the account is paying and switch deals if it’s no longer any good.
Some accounts that call themselves easy access may also limit the number of withdrawals you can make each year without losing interest – so check this too.
With notice accounts, you generally have to wait between 30 and 120 days to withdraw your money. This means they won’t be suitable if you need access to your cash in a hurry – as the terms state you will lose interest if an emergency withdrawal is made.
While notice accounts tend to offer higher interest rates than those that provide instant access to your money, this isn’t always the case – so check out easy access rates too before applying.
And as most easy access accounts have variable, rather than fixed, rates, it’s just as important to monitor your returns and switch if the deal is no longer competitive.
Regular savings accounts
Regular savings accounts, which require a set monthly payment – often between £25 and £300 – are a great option for building up savings.
But while rates are higher, the overall benefits are limited as you will only earn interest on the amount in the account as it builds up. You will also be penalised for missing a payment and you won’t have access to your money for the typical12-month term.
Fixed-rate bonds are savings accounts that offer a fixed interest rate on your cash for a set period of time, say between one and five years.
The pay-off for giving up access to your money by paying into an account of this kind is that you should receive a higher rate than you will on an easy access or notice account.
And, generally speaking, the longer you’re prepared to lock your cash away for, the higher your return will be.
You will have to pay a penalty should you need to access your money within the term, though.
As most fixed-rate bonds do not allow you to add to your balance, they are also only suitable for people with a lump sum to invest.