Protect yourself from inflation by keeping your funds in a high interest account.
Believe it or not, you can still lose out when using a savings account. If the rate of inflation (the rise in the cost of living) is higher than your savings rate then you are making a loss in real terms.
For example, if inflation measured 3%, a typical basket of goods valued at £1,000 would cost an extra £30 the following year. If the same £1,000 was placed in a savings account offering 2.5%, it would return £25 (£20 net), meaning that the purchasing power of that sum had fallen.
When inflation breached 5% in 2011, basic rate taxpaying savers needed to find accounts paying at least 6.5% interest to avoid losing out in real terms after tax. One guaranteed way of protecting against inflation is through an inflation-linked bond.
You may also find that the best interest rates (up to 5%) are available through current accounts rather than savings accounts.
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 gets taxed. Higher rate 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 / investment or cash ISA.
The ISA limit is currently £11,880 (2014-2015). Half of this (£5,940) can be invested in cash, while the full quota (or the remainder) can be invested into an investment ISA.
Savers can only invest into one cash ISA and/or one investment ISA in any given tax year. These terms will change in July 2014, when the ISA allowance increases (find out more).
Any unused tax-free ISA allowance does not carry over to the following year, so any allowance that remains unused is lost.
Deposit chunks of cash into fixed-rate bonds.
Savers can 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, though this is not always the case.
If you have a surplus in your current account that you could manage without for a year or more, a fixed-rate bond is an ideal savings account. By sacrificing access to your savings for a period of time it is possible to earn considerably rates higher than the best instant access savings accounts.
Investment bonds are an exciting savings option, allowing saver the opportunity to earn much higher returns on their investment. There can be greater risks involved with this kind of account, but this is balanced by the prospect of greater returns. This can be a very attractive offer when banks are offering low interest rates on regular savings accounts.
The risk involved can be on the capital you make, or simply on the potential returns on your investment. By choosing your account carefully you can protect 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]
This is also a great way to invest into your ISA allowance. Up to £11,880 per year can be invested into investment bonds, allowing you to gain the full amount of your returns without having to pay any tax. 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 bonds page.
Treat current accounts as savings accounts.
Traditionally, it's been worth keeping your savings separate from your current account as there have been higher interest options available. Now, though, it is often current accounts that offer the better rates on deposits.
The best rate of interest currently available through current accounts is 5% (Nationwide / TSB), which is several times better than the rates offered by standard savings accounts.
If you prefer to keep your funds in a separate savings account, employ careful money-management skills to ensure that there are enough funds in your current account to cover direct debits and spending. Transferring funds between your current account and your instant access savings account can be done very easily with online banking.
On the other hand, if you have a high-interest current account and choose to leave your funds there to accrue more interest, this micro-management is no longer necessary.
Have your salary paid into wherever your interest returns are highest.
Whether you gain more interest from your current account or savings account, see if it is possible to have your salary paid there. It is a great way of earning higher interest on it as soon as it arrives in your account. If you keep the bulk of your funds outside your current account, you can easily transfer funds between accounts as and when required.
Be wary, though, that some of the more generous current accounts stipulate that account holders must deposit a minimum amount per month (typically £500 - £1,000) to qualify for the higher interest.
Set up Internet Banking.
All the instant access savings accounts listed on Which4U come with online banking facilities. Once you have applied for one of these accounts you will be able to set this up, giving you 24/7 access to your savings account. This will enable you to view your statements, transfer your funds, and manage your accounts.
Set yourself savings goals or 'targets'.
A goal or target, such as a holiday, helps for saving more effectively. Saving is psychologically driven, and a goal helps you to think about efficiencies or opportunities to achieve your savings goal quicker. Some savings accounts allow you to set up 'virtual pots', to which purposes such as ‘car’ or ‘holiday’ can be assigned.
If you are self-employed, why not 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!
Protect yourself from bank failures by depositing no more than £85,000 in any one financial institution.