This is traditionally the time of year when cash Isa providers battle to boost business by upping rates and launching new products ahead of the new tax year, but savers are currently experiencing one of the worst Isa seasons, with limited choice and paltry rates.
The gap between interest paid on cash Isas and ordinary savings accounts has become increasingly narrow. The average cash Isa has plummeted to 1.28%, with the average savings rate not far behind at 0.63%.
With such slim pickings, it’s harder than ever to find a decent home for your savings, but we’ve got some tips to help you make the most of your money.
1. Be prepared to switch providers to get the best rates
With the market in its current state, complacency isn’t an option for savers who want decent returns. Our Savings Booster tool will show you where to move your money to take advantage of a better rate.
2. Take tax into account
If you’re a taxpayer, you need to look beyond headline rates on standard accounts and consider how much your savings will earn once tax is deducted. To calculate this, basic-rate taxpayers should multiply the gross rate by 0.8 and higher rate taxpayers by 0.6.
If you’re married and one of you pays tax at a higher rate than the other, you can save tax by transferring savings to the one paying the lower rate.
Because interest on savings in a cash Isa is free of tax, this is usually still the best place for savers to start, despite the disappointing returns. You’ve got until 6 April 2014 to make the most of your tax-free allowance, which is currently £5,760.
3. Become a regular saver
Regular savings accounts can pay much healthier rates than ordinary savings accounts. But you can’t compare headline rates directly as putting money in month by month affects how much interest you’ll earn.
For example, if you saved £1,000 in a regular saver paying 6% by depositing £83.33 a month, you’d get £32 interest before tax – not the £60 you might expect from a lump sum of £1,000. You must be able to commit to monthly deposits (typically between £20 and £500) and make no withdrawals.
4. Save in a current account
You can now earn more interest on cash in top-paying current accounts than the best instant-access savings accounts. Nationwide, Lloyds Bank and Santander are among the providers that pay interest on credit in current accounts.
But there are restrictions to watch out for, including interest being paid for a limited period and only on balances up to a certain amount.
5. Beat inflation
Basic rate taxpayers need to find an ordinary savings account account paying at least 2.38% to match or beat inflation. There are currently 31 accounts that fit this description, but you’ll need to tie your money up for at least three years.
As interest earned in a cash Isa is free of tax, you simply need to find one that matches the headline rate of inflation. There are currently 50 cash Isas match or beat inflation by offering rates of 1.9% or more, but only four of them are instant access and all those come with restrictions.
6. Keep your savings safe
Make sure you don’t exceed the Financial Services Compensation Scheme protection limit of £85,000 per person per banking licence. Follow our five steps to keeping your savings safe to ensure your money is protected.
7. Venture into investments
If you can accept some risk and don’t need instant access to your money, investing on the stock market offers greater potential for growth than traditional savings options. To minimise risk, spread your investments across a range of assets.
- Peer-to-peer lending explained – read about a new alternative to traditional savings accounts.
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- Best rate savings accounts – we round up the best deals on the market.