Why you can’t afford not to save

Current economic uncertainty means it’s more important than ever to have a savings cushion in place to protect yourself in the event that you lose your job.

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Although the gross domestic product (GDP) between July and September grew faster than expected at 0.5%, experts have warned that  that this figure overstates the underlying health of the economy.

With the Monetary Policy Committee trying to prevent a double-dip recession, interest rates were again held at 0.5% again this week.

Despite this, there are still plenty of accounts offering respectable amounts of interest which can help you to build up a savings nest egg.

Here, we take a look at some of the best available options, whether you want to tie up your money for a year or more, or if you want instant access to your cash.

Make the most of tax-free allowances

The best way to maximise your savings returns in today’s low interest rate environment is to make the most of your individual savings account (ISA) allowance each year.

Returns are tax-free and this tax year you can invest £5,340 in a cash ISA and the same amount in stocks and shares. Alternatively you can invest the full £10,680 allowance in stocks and shares.

Northern Rock’s Online eISA, for example, which is exclusive to MoneySupermarket, pays 3.05% tax-free on a minimum investment of just £1. The account accepts transfers from existing ISAs.

Other competitive ISAs include ING Direct’s cash ISA, paying 3.00%, again on a minimum investment of £1. This rate is guaranteed for a year, so you may want to move your money at the end of this period.

Have instant access funds available

You should always keep some money in an easy access account so that you can get your hands on it quickly in the event of an emergency.

Experts recommend trying to build up a savings pot equivalent to at least three months’ salary.The good news is that there are several easy access accounts which pay interest six times higher than the current base rate.
 
Nationwide’s MySave Online Plus account pays 3.12%, but you can only make one penalty-free withdrawal a year from this account.  This rate includes a bonus of 1.58% which is only payable for the first year, so you may want to move your money at the end of this period.

Other easy access accounts which are worth considering include Santander’s eSaver Issue 4, paying 3.10% on a minimum investment of £1.

Again this rate includes a bonus, so you will need to move your money after the first year. Bank of Ireland’s WebSave account and the Post Office’s Online Saver Issue 4 account pays 3.05% and 3.01% respectively, and both of these accounts can also be opened with £1.

These rates also include bonuses, so you should make a note in your diary when they end.

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Fix for higher returns

Some of the best savings rates can be found on fixed rate bonds, although you usually won’t be able to make any withdrawals during the fixed rate term, so these won’t be suitable for cash you will need to get hold of quickly.
 
One of the best rates currently available is on Coventry Building Society’s Poppy Bond savings account, which pays 3.55% annual interest before tax for 18 months. The bond can be opened with a minimum deposit of just £1.

In addition, the Coventry will make a donation to the Poppy Appeal of 0.05% of the total funds invested in the Poppy Bond.

The Yorkshire Building Society Fixed Rate EBond  paying 3.50% on a minimum investment of £1,000, is another 18-month bond worth a look, and, as with the Coventry bond, savers can choose whether they want to receive interest monthly or annually.

If you only want to tie your money up for a year, then the current market-leading online one year fixed rate bond is from Aldermore, at 3.46% on a minimum investment of £1,000.

Longer term savers, however, may want to considerHalifax’s 3 Year Fixed Online Saver account, paying 4.10% on a minimum investment of £500, or if you can afford to tie up your money for five years, BM Savings 5 Year fixed rate bond or AA 5 year fixed rate savings, which pay 4.65% and 4.60% respectively and can both be opened with £1.

Bear in mind, however, that if you are planning on tying your money up for several years that while rates may look competitive now they may not seem quite as appealing in a few years’ time when interest rates start to rise.

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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