Where should I put my savings?

The nation has become increasingly cash-strapped as the recession deepens. More than a third of consumers have less in savings now than they did two years ago according to an independent survey carried out for moneysupermarket.com.

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Many assume that with interest rates at record lows – the base rate has dropped by 4.5 percentage points to 0.5% since last October – the returns on savings accounts have plunged meaning there is little point in starting to save now.

However, as we discuss in our video ‘What’s the point in saving?’ saving remains as important as ever. Putting a little aside each month for a rainy day can offer vital peace of mind and even though the average savings rate has slumped to 0.17% on instant access accounts, according to the Bank of England, there are still a number of attractive rates worth capitalising on – you just have to make sure you’re taking advantage of the leading deals.

To do this, you need to work out what type of account is most suitable for your needs. Our article ‘How to choose a savings account’ will point you in the right direction.

From there, use our savings comparison tool to find the best rate.

Remember, if you’re a taxpayer and have yet to use your cash ISA allowance this year you have until midnight on April 5 to shelter £3,600 from the taxman – read our article ‘Get your ISA now – it’s your last chance’.

If you’ve already used your Isa allowance, or have more than £3,600 in savings, go for one of the highest paying standard savings accounts and maximise returns that way. Here we take a look at some of the leading deals.

If you can lock your money away

Fixed rate bonds are worth considering if you have a pot of money you won’t need to access for a while. Although interest rates aren’t expected to fall any further, the leading fixed rates are higher than those available on the highest-paying variable rate accounts.

And fixed rates still seem to be rising (while the rates on many variable rate accounts could fall in the coming days as providers pass on this month’s interest rate cut). That said when comparing fixed rate deals you need to consider more than just the rate – the length of the fixed term is also important.

Nationwide Building Society has launched two new five-year deals – its Five Year Fixed Rate Bond and Five Year e-Bond - both of which pay a market-leading rate of 4.15%. However, with the base rate at a historic low, it may not be the best time to fix your savings rate for five years. Interest rates will start rising again at some point and the risk of locking your money away for such a long period of time is that your savings could be stuck in an account that becomes uncompetitive.

A one or two-year fixed deal may therefore be a better option at the current time. ICICI Bank has the leading one and two year bonds. Its two-year HiSave Fixed Rate Account is paying 4.10%, while its one-year account is paying 3.90%.

Both of these products require a minimum investment of £1,000. If you aren’t looking to lock that much away, there are other options, including the AA One Year Fixed Rate Bond at 3.75% which only requires you to deposit £500.

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If you want regular access to your cash

Easy access accounts are popular because they provide much more flexibility. In theory you can dip in and out of your savings whenever you want although you should be wary as some of these accounts will penalise you for making too many withdrawals so read the small print before applying.

The highest rate you can get at the moment is 3.0%, but there are a number of providers offering this level of return. These include Bradford & Bingley; Sainsbury’s Bank, Alliance & Leicester; and Abbey. However, all of these deals include bonuses for the first 12 months or more meaning that after one year savvy savers should shop around again to find a more competitive rate.

Remember that all of these products are variable and the rates on the B&B, A&L and Abbey accounts haven’t yet changed following this month’s rate cut so they could fall in the coming days.

If you want to get in the savings habit

If you don’t save already – and around a quarter of people don’t according to our survey - a good way of getting into the habit is to open a regular savings account. These products pay a fixed rate of interest for a set term, usually a year, and you must pay money into the account every month which is why this type of product is great for those who struggle to discipline themselves into saving regularly.

Barclays’ Monthly Saver Account, for example, pays 6.0% and the minimum monthly investment is just £25. You can put away more than that if you can afford to but the maximum is capped at £250.

And remember…

No matter which deal you go for, if you have more than £50,000 to save spread your money around to ensure you’re covered by the Financial Services Compensation Scheme. We have more on this in our article “Who owns who?”

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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