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A savings account masterclass: how to get the most from your money
Far too many people think "savings rates are so low, why bother doing anything?” Yet, while rates are indeed spitworthily low, don’t be complacent. Active, on-the-ball savers can grab up to 6% interest. So I want to give you a rate-boosting masterclass.
The aim's to put every penny where it earns the max interest. Many specialist higher-rate accounts only let you pay in limited amounts for short amounts of time.
So if you've big savings, you need to fill them up, then snowball on to the next best, and so on. Don’t overly worry about safety.
All UK-regulated savings (which all the accounts below are) have the full £85,000 per person, per financial institution savings safety protection. Yet that’s not a reason to just put money in and forget about it. Monitor rates every few months and if they drop, ditch and switch.
First, clear expensive debts
The highest guaranteed return for savings comes from clearing expensive debts, starting with the highest rates. If your debts cost more than your savings earn after tax, clear what you can and you’re onto a winner.
This applies to mortgages too, unless you’ve early repayment penalties. Though with a mortgage, always have a cash emergency fund in savings before clearing it.
Earn 6% AER in a regular saver, PLUS free £100
The highest rate on the market is a regular savings account, but it's only available to new or existing Firstdirect.com current account customers. Though as First Direct's won every customer service poll I've ever done and currently offers £100 to switch to it, that's still an attractive proposition.
Its 6% regular saver lets you put up to £300 a month away for a year and the rate's fixed. HSBC.co.uk customers get 4% AER on a similar product, while anyone can get the LeedsBuildingSociety.co.uk regular saver at 3.05% AER. Full info and more best buys at mse.me/regularsaver
Use current accounts to get 5% AER easy access
I always used to say “never store cash in current accounts, as you earn nothing". While that still holds true in the main, bizarrely, these days a few bank accounts offer super-high interest rates to draw you in.
The highest is Nationwide's FlexDirect (www.nationwide.co.uk/flexdirect) at 5% AER, but you only get this rate for a year, and only on balances up to £2,500. The stand-out deal's Santander 123's (www.santander.com) 3% AER on all savings if you've £3k-£20k. It has a £2/month fee, but pays up to 3% cashback on bills. Weigh up if you'll earn more than the fee before switching.
With both, you need to properly switch to them. Full info, pros and cons at mse.me/bankaccounts
Is an Isa nicer? Up to 1.75% AER tax-free
A cash Isa's just a savings account where the taxman doesn't remove 20% or 40% of your interest. You can put £5,760 in each tax year, and it remains tax-free year after year until you withdraw it. It's a no-brainer.
Don't think you're locking the cash away - the top easy access deal is from Postoffice.co.uk at 1.8% AER on £100+, with two penalty-free withdrawals allowed each tax year. This allows you to transfer old Isas into it as well to boost their rates.
The rate includes a bonus for 18 months, so it'll almost certainly plummet after. Make a note in your diary to ditch and transfer. Full best buys and Isa FAQs at www.mse.me/isas.
Lock in for up to 2.57% AER
If you’re prepared to lock cash away without access, you can earn more in a fix. Yet it's worth noting many pundits predict UK rates will rise in 2015. So today's best rates may not look so good if you lock in for too long.
These are the current top fixed deals for both normal savings and cash Isas. They change daily – latest rates are at mse.me/fixedsavings One-year fixed savings: United Bank 1.9% (www.ubluk.com). One-year cash Isa fix: Britannia 1.85% (britannia.co.uk) Two-year fixed savings: United Bank 2.28% (www.ubluk.com). Two-year cash Isa fix: Post Office 2.25% (www.postoffice.co.uk) Three-year fixed savings: Bank of Cyprus 2.57% (www.bankofcyprus.co.uk). Three-year cash Isa fix: Virgin Money 2.4% (virginmoney.com)
Check your local credit union too
Credit unions are local savings and loans co-ops. Some have deals that beat the market's best buys, such as 3% savings, 2.15% AER one-year fixes and 2.5% easy-access cash Isas.
They're very localised, so whether you can get these deals depends on where you live or work. Locate ones near you at www.findyourcreditunion.co.uk.
1.5% AER standard easy access savings
If you’ve any left, the final option's a normal easy access savings account. The top payers are www.tescobank.com and www.icicibank.co.uk at 1.5% AER, although Tesco's account includes a bonus rate for the first year, so it's likely to plummet afterwards.
If you’ve big cash, as you’re only protected up to £85,000 per institution, split the cash into different institutions.
If you're prepared to up the risk a little, it's worth looking at peer-to-peer savings, which can pay up to 6%. Here your money's lent to someone who wants to borrow it, via online financial matchmakers such as zopa.com, fundingcircle.com and ratesetter.com. This can be lucrative, but it has its risks, though the sites try to mitigate them. For full info, read mse.me/peertopeer.
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