10 essential tips for savers

Struggling to get a decent return on your savings? Follow these top tips…

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In today’s low interest rate environment, getting a decent return on your savings is a challenge. But there are still ways you can ensure that your money is working as hard as possible for you.

Here, we offer our top 10 tips to make the most of your savings...

1. Use your ISA allowance

Thanks to the introduction of the personal savings allowance in April 2016, you could argue tax-free ISAs are no longer quite so attractive.

The personal savings allowance means basic rate taxpayers can earn up to £1,000 of savings interest a year tax-free in any savings account, including peer-to-peer and current accounts. Higher rate tax payers can earn up to £500.

However, it’s still worth using this tax year’s ISA allowance of £15,240 as any interest you earn from cash ISAs doesn’t count towards your personal savings allowance.

What’s more, although you need a fairly large savings pot to use up your personal savings allowance, if interest rates rise, you’ll need to save much less to hit the £1,000 or £500 threshold.

Plus we don't know how long the personal savings allowance will be around for.

You can split your ISA allowance between cash, stocks and shares, and peer-to-peer investments via the newly launched Innovative Finance ISA.

2. Lock into a fixed rate account for higher interest

Fixed rate accounts tend to offer among the highest savings rates as you must usually agree to leave your money untouched for a set period of time.

And the longer you agree to lock your money away for, the more interest you’re likely to earn.

Charter Savings Bank, for example, offers 1.66% AER fixed for one year, so long as you open the account with at least £1,000.

However, if you can tie up your funds for longer, Paragon Bank pays 2.30% AER fixed for five years. Again, you will need £1,000 to open the account.

Just be wary of locking away your money for too long in case interest rates rise and your money is tied up in an account that is no longer competitive.

3. Start the regular savings habit

Paying a little each month into a regular savings account is an excellent way to start the savings habit, and interest rates are usually pretty competitive.

If you’re a 1st Account holder with First Direct, for example, you can take advantage of the bank’s regular saver account which pays a competitive 6.00% AER fixed for 12 months, so long as you pay in between £25 and £300 a month.

HSBC and M&S Bank also both offer regular saver accounts paying 6.00% AER fixed for 12 months, so long as you pay in between £25 and £250 a month and are existing current account holders (with HSBC, you must be a Premier or Advance customer to qualify for the 6.00% rate). 

Alternatively, Santander offers a regular e-Saver paying 5.00% AER (variable) for the first 12 months. You can save up to £200 a month and after 12 months, the account becomes an Everyday Saver account which pays 0.25% AER (variable).

4. Build up a rainy day fund

Experts recommend trying to save up between three and six months’ salary in an easy access account, so that you have a financial buffer in place in the event of an emergency.

Unfortunately, interest rates on easy access accounts are nothing to get excited about, but it’s still important to have an emergency savings cushion to fall back on.

Virgin Money's Defined Access E-Saver pays 1.26% AER (variable) on balances of £1 or more. However, if you make four or more withdrawals in a calendar year, the rate falls to 0.50% AER (variable) until the end of the year.

5. Earn interest on your current account

If you rarely go overdrawn and tend to keep a high balance in your current account, make sure you earn interest on it.

Current accounts are also a good alternative to easy access accounts, as you’ll still be able to get your hands on your cash, but you’re likely to earn a better rate of interest.

The Santander 123 current account, for example, pays 3.00% AER (variable) on balances between £3,000 and £20,000.

You’ll also earn 2.00% AER (variable) on balances between £2,000 and £2,999.99 and 1.00% AER (variable) on balances between £1,000 and £1,999.99.

To qualify, you will need to pay in at least £500 a month, have at least two active direct debits on your account and pay a £5 monthly fee.

You will also earn cashback of up to 3% on some of your household bills.

Alternatively, the TSB Classic Plus account pays 5.00% AER (variable) on balances up to £2,000.

You must pay in at least £500 a month and register for internet banking, paperless statements and paperless correspondence.

You will also earn 5% cashback on your first £100 of contactless or Apple Pay payments every month until the end of September 2017 (or December 2016 if you opened your account before June 2016).

6. Think about peer-to-peer

Another way to boost your savings is with peer-to-peer lending, where you lend directly to consumers and small businesses, side-stepping the banks.

Because of this you can earn higher returns than with a traditional savings account.

For example, the current estimated return with Funding Circle is 7.2% a year, after fees and bad debt.

As of April 2016, peer-to-peer saving can be held within an Innovative Finance ISA, meaning you won’t pay tax on your returns. Just be aware not all lending platforms have set them up yet.

However, the big drawback to peer-to-peer is your savings won’t be covered under the Financial Services Compensation Scheme which protects the first £75,000 of your savings should your bank or building society go bust.

But many lenders have compensation arrangements of their own.

7. Get the kids saving

Encouraging your children to put a little bit of their pocket money into savings each month could make a big different to them later on, as well as teaching them how to manage money.

Interest rates on children’s account are often competitive too. Halifax’s Kids' Regular Saver account, for example, pays 4.00% AER fixed for a year if you pay in between £10 and £100 each month.

 

8. Put money in your spouse's name

If your husband or wife is in a lower tax band than you, putting your savings in their name will mean you benefit from a higher personal savings allowance.

Married couples and those in civil partnerships can also, in some circumstances, transfer their tax-free personal allowance between one another to reduce their tax bill by up to £220.

9. Move your money when bonus periods end

A number of savings accounts carry short term bonuses that disappear after the first year.

It is therefore imperative to make sure you review your savings again once the bonus goes, and if the account is no longer competitive, you should move your money as quickly as possible.

10. Offset your savings

Given today’s low interest rate environment, you might want to consider using some of your savings to reduce the amount of interest you pay on your mortgage.

Offset mortgages, as their name suggest, give you the option to offset your savings against what you owe on your mortgage. So, although you won’t be credited with any interest on your savings, you don’t have to pay any interest on the equivalent amount of your outstanding mortgage.

For example, if a borrower has a £200,000 mortgage and £80,000 in savings, they will only pay interest on the difference - £120,000 - enabling the homeowner to reduce the mortgage term by several years.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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