Risk-free investingLow-risk options

There are many types of savings accounts

National savings and gilts

One of the lowest risk investment option is the National Savings and Investments (NS&I) tax-free saving certificates. Particularly index-linked certificates, which guarantee to outstrip inflation.

A number of issues are offered each year, and you can invest up to £15,000 in each one.

If interest was, say, at 1.35% plus inflation, with RPI at 3.9% it would give a rate of 5.25% equivalent to 6.55% gross for a basic-rate, 8.75% for higher-rate, taxpayers.

Alongside these are British government stocks or gilts, which can be bought through a stockbroker. 

These usually pay interest twice a year, plus the stock’s nominal value when it reaches its redemption date, which may be ten or more years later. They can be sold before this for a less certain return.

Cash Isas

A good way of boosting your savings is to hold them in a cash Isa. The interest from these accounts is tax-free.

You can pay in up to £3,600 each year and top up your Isa holdings annually. Most savers can benefit by using their annual Isa allowance before putting any remaining funds into ordinary taxed accounts.

See our reviews of Best Buy cash Isas.

Savings accounts

You may use a current account for everyday spending, but it makes sense to move any surplus funds into a savings account.

In choosing one, you need to look carefully at its features as well as the interest rate it pays.

Instant or easy-access accounts suit those who may need to withdraw money at short notice. They are suitable accounts for rainy day funds but don't offer much growth above inflation.

See our reviews of Best Buy savings accounts. 

For example, if you invested £10,000, the gross interest you would get at 6.4% is £640. Tax at 20% on this is £128, which leaves £512 net. For higher-rate taxpayers the net rate is 3.84%, which means their money lags 0.06% behind inflation.

Putting cash under the mattress can loose you money

Higher rates of interest are often offered to savers when they open a new account. These bonus rates commonly last for 6-12 months, reverting to a lower rate thereafter, so it is worth making regular checks to confirm the rate you will receive.

Some savings accounts offer higher rates of interest to those who can give 30, 60 or even 90-days notice before making withdrawals. Although the best easy-access accounts increasingly tend to match these.

Others limit the number of withdrawals you can make to three or four a year – deducting interest if you need to make more. Another common feature is tiered interest rates, where those who can afford to deposit a large sum are paid a higher rate.

Regular deposits can also earn you higher rates with some accounts. Accounts of this kind do not normally allow withdrawals during the year though and are often capped in terms of the total amount you can save.

Higher rates still can be earned by combining your savings and current account, or saving with your mortgage provider.

Bonds

Bonds could provide an option for those looking to invest.

Guaranteed income or growth bonds are sold by insurance companies and guarantee to repay your original investment, plus interest, provided you hold them for the full term – typically up to five years. As with any fixed-rate product, you may lose out if the base rate rises.

Guaranteed equity bonds offer a less certain return and are only risk free in that you should get back your original investment, but interest paid is linked to stock-market performance. There is a risk of a poor return if equities fall over the period you hold the bond.

NS&I also pays premium bond prizes tax free. These are not the same as guaranteed interest, as you may not win, but your original investment is never at risk, except from inflation if you don’t win anything.

Cash under the mattress

Finally, worried savers may be tempted to put their cash under the mattress. But surprisingly, this is a fairly risky strategy.

As it is not earning interest, your capital will be seriously eroded by inflation. For example, at current rates, after ten years, £100 would be worth only £67.17.

So, while greater risk may bring greater reward, there are numerous alternatives for risk-averse savers to get solid returns on their money and to keep their savings secure.

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