With many accounts paying low rates and inflation on the up, Which? Money experts have compiled five tips that should help maximise the return you earn on your savings.
1. Make full use of your Isa allowance
Individual savings accounts (Isas) should generally be the first port of call for savers, because they allow you to earn tax-free interest on your cash.
Effectively, Isas act as ‘wrappers’ that will protect your money from the tax deductions that usually wipe out 20% of the savings interest earned by basic rate taxpayers, and 40% of the interest earned by higher rate taxpayers.
There is around five weeks left of the current tax year – so if you haven’t yet used your full Isa allowance for 2009/2010, now’s the time to take advantage it.
From April 5 2010, all savers will be able to place a maximum of £10,200 in Isas. You’ll be able to put a maximum of £5,100 in a cash Isa, though if you choose to you could invest the full £10,200 in a stocks and shares Isa. You can read more about these in the Stocks and shares Isas explained advice guide.
When choosing a cash Isa, it’s important to consider whether an instant access or fixed-rate account will be best for you, and to shop around for the best Isa rate you can find. The Which? Best Rate Isa tables will help you track down the right deal.
However, you should also ensure the rate on offer from your Isa provider competes not only with the best Isa deals available, but also with the after-tax interest you could earn by putting your money in a market-leading savings account. Don’t assume that the tax-free status of Isa savings means they are always going to offer the best return – especially if you are a basic rate taxpayer.
2. Consider an NS&I savings certificate
With CPI inflation now at 3.5%, it is currently difficult for many savers – particularly higher-rate taxpayers – to find an account that offers a ‘real’ return on their money. You can find out more about the impact of inflation on your savings by listening to this .
If you’re concerned that inflation is eating away at your nest egg, you could consider investing in an index-linked savings certificate from National Savings & Investments (NS&I).
These bonds are tax-free, and the rates payable on them are linked to the Retail Prices Index (RPI) measure of inflation. Currently, both the three- and five-year issues of the index-linked savings certificate are paying RPI plus 1% – which adds up to a very attractive 4.7% AER.
However, while NS&I’s savings certificates are guaranteed to beat inflation, they are not guaranteed to offer rates that compete with those available elsewhere. If the Bank of England base rate increases and other savings deals improve, you could end up out of pocket.
On the other hand, NS&I is a government-backed savings organisation that offers 100% protection for any cash you deposit with it. This may appeal to some savers who want extra reassurance that their money is secure.
3. Compare a variety of savings accounts
It’s important to check the rate you are earning on your savings regularly and ensure that it is competitive. If you’re getting a bad deal from your bank or building society, make sure you shift your money into an account that offers you more interest.
Many of the market’s top instant access accounts now come with introductory bonuses, so it’s crucial for savers with these deals to move their money as soon as these promotional periods expire. If you don’t, you’ll find the rate payable on your savings drops dramatically.
It’s also worth taking some time to research the different types of savings account available and ensure you’ve picked the right one for your circumstances. Right now, fixed-rate bonds offer the best returns available – but before choosing one, you must make sure you can afford to give up access to your money for a set period of time.
4. Go for an offset mortgage
An offset mortgage allows you to balance your savings against your outstanding mortgage debt, so that you only pay interest on the difference. Technically, you won’t receive any interest on your savings – but in effect you’ll be earning the same rate on them as you pay on your home loan.
Offsetting your savings against your mortgage could help you pay off your home loan early and save a significant amount in interest payments, while allowing you access to your rainy-day fund should you need it.
However, offsetting doesn’t work for everyone and offset mortgages are usually more expensive than standard deals. Read more about offset mortgages in our guide to choosing the right mortgage type for you.
5. Invest in stocks and shares
Finally, if you’re not happy with the rate of return on your cash savings, you could consider investing your money. If you’re unsure of where to start the Which? beginner’s guide to investment could prove a useful resource.
If you decide to try investing, it is important to arm yourself with plenty of information in advance and ensure you know the risks to your capital. You might want to read the Understanding investment risk advice guide.
This also contains plenty of useful tips for those just starting out as investors.