How do you make the most of your savings? Avoiding bonus pitfalls, using tax-free allowances, seeking profitable current accounts, and paying into fixed-rate bonds are all useful ways of boosting returns on your savings. Read on for Which4U's top ten savings tips.
1. Protect yourself from inflation. Keep your funds in a high-interest savings account.
If the rate of inflation (the rise in the cost of living) is higher than the returns offered by your savings account, the purchasing power of your money is falling and you are making a loss in real terms.
When inflation breached 5% in 2011, basic rate taxpayers needed to find accounts paying at least 6.5% interest to avoid losing out after tax, which leaves few options beyond investment plans.
Could you have your salary paid or transferred into a higher interest account? It's a great way of earning higher interest on your salary as soon as it arrives in your account. You can then transfer funds to your current account as and when required.
Unless your current account pays interest (Tip 6), use an instant-access savings account as much as possible. With a little careful money-management, you could be earning a little more every day.
2. Avoid crashing returns on savings: beware of bonuses!
It is no longer straightforward to keep your funds in a high returning account because of the bonus rates that are attached to most traditional savings products.
Many variable rate savings products (including ISAs) are now inflated with bonus rates that typically last 12 months before falling away – often to very little.
Our editorial on savings accounts and bonuses and our other savings guides offer more details on how to avoid the bonus trapdoor.
3. Make use of your annual tax free ISA allowance.
For basic rate taxpayers, taxable savings income begins at £2,880. Above this amount, 20% of any interest received on savings is taxed. Taxpayers earning over £31,865 will be taxed 40% on their savings, while those earning over £150,000 will be taxed at 45%. The only tax relief available on savings is through a growth ISA, an investment ISA, or a cash ISA.
The ISA limit is currently £11,880 (2014-2015), of which half (£5,940) can be invested in cash. The full quota can be invested into a stock ISA if the cash ISA allowance is not taken, or the remainder can go into a stock ISA after the cash ISA has been filled.
Funds can only be added to one cash and one stock ISA during each financial year. In this way, ISAs combine both types of investment. ISAs enable savings income on dividends, bonuses and interest without tax.
For more information, see our ISA section and our guide to cash ISAs.
4. Deposit cash into fixed-rate bonds.
Savers can often find higher interest rates by locking money away in fixed-rate bonds for a set period. Typically, the longer the bond, the higher the interest rate on offer.
If you have surplus funds that you could invest for a year or more, a fixed-rate bond is an ideal savings account if your tax-free cash ISA allocation has been filled. By sacrificing access to your savings for a period of time it is possible to earn higher rates.
For more information, see our guide on Fixed-Rate Bonds.
5. Investment Plans and ISAs.
Investment bonds and ISAs are savings options that allow savers to take risks in the pursuit of greater returns. This can be a very attractive proposition when banks are offering low interest rates on regular savings accounts.
By choosing your account carefully, you can preserve your main investment through Capital Protection, allowing you the chance of great returns while knowing that your money is safe. [Our tables clearly note where capital is at risk. See image below.]
This is also a great way to invest into your ISA allowance. Up to £11,880 per year can be invested into investment plans, allowing you to recoup the whole of the returns tax-free. This allows fantastic earnings, as there is no limit on how much you can earn per year.
For a full list of our investment products, check out our investment plans page.
6. Consider an interest-rich current account.
Many are reluctant to change banks because of the difficulty and inconvenience of transferring payments and direct debits. However, this became much easier in 2013, thanks to a new system that allows customers to switch accounts within seven days. Some banks and building societies are adding attractive incentives to their current accounts rather than savings accounts to attract new customers.
Did you know that there are current accounts paying up to 5% in interest? (Correct to April 2014). This eclipses almost all savings accounts at the moment. It's something to consider as part of your savings strategy.
7. Set up Internet Banking.
The instant access savings accounts listed on Which4U tend to come with online banking facilities. Once you have applied for one of these accounts, setting this up will give you 24/7 access to your savings account. This will enable you to view your statements, transfer your funds, and manage your accounts at your own convenience.
Preferential rates can often be found through internet accounts too!
8. Set yourself savings goals or 'targets'.
A goal or target, such as a holiday, helps for saving more effectively. Some savings accounts allow you to set up 'virtual pots', to which endgoals such as ‘car’ or ‘holiday’ can be assigned.
Saving is psychologically driven. Having a goal helps savers to think about the efficiencies and opportunities that could enable them to achieve their goal quicker.
9. Self-employed savers: Move your business funds to a high-interest account.
If you are self-employed, you can apply the same personal savings mentality to your business. Many business bank accounts charge for depositing funds, paying cheques and transferring money, and offer poor levels of interest on positive balances.
Which4U lists business bank accounts that offer free banking for life. Better finances for your business means greater rewards for you!
10. Protect your savings.
Protect your savings from bank failures by depositing no more than £85,000 in any one financial institution. See our guide to Secure Savings and Compensation for more details.