Risk-free investing Low-risk options
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 £5,760 in the 2013-14 tax year, and top up your Isa account annually. Most savers can benefit by using their annual Isa allowance before putting any remaining funds into ordinary taxed accounts. But remember that if you want to move your Isa to a higher interest product, apply to transfer it rather than taking out the money and reinvesting it yourself.
This is because if you withdraw your money and then reinvest it during the same tax year, you'll be using up all or part of your tax free allowance for that tax year.
See our reviews of Best Rate cash Isas.
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 Rate 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.
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 and often the best interest rates can be from accounts accessed online.
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 could provide another safer 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.
National Savings & Investments (NS&I) 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, even if inflation is currently low. And you won't be able to claim on your house insurance if your cash is stolen or goes up in smoke.
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