Savers will not look back fondly on 2019, as the past 12 months have seen all average savings rates take a tumble. To get a decent return in 2020, you’ll have to be a little savvier.
Longer term fixed-rate savings accounts have been the hardest hit, with average rates dropping from 1.86% AER in January 2019 to just 1.51% in December. Average rates for one-year fixed accounts have decreased too, from 1.43% to 1.23% over the same period.
Here, we have seven top tips for making the most of your savings – from maxing out current account bonuses to splitting your savings across several fixed-term accounts.
1. Try this fixed-term savings hack
The general rule is that the longer you lock your money away for, the higher the interest rate will be.
However, few people can afford to lose access to their cash for years at a time, and instead tend to keep it in low-interest instant-access accounts.
By opening a number of fixed-term accounts of different lengths, you can get the benefits of long-term rates while always have some money available as the accounts mature each year.
The diagram below shows how this could work between 2020 and 2027.
2. Combine current account bonuses
It’s not just savings accounts that pay interest on your cash – some high-interest current accounts pay competitive rates. In fact, one (Nationwide’s FlexDirect account) pays the highest interest rate of any other account currently on the market.
However, these accounts often require minimum monthly deposits. Generally, this means most people stick to one account, and use their salary to tick the monthly deposit box. But there’s nothing that says you can’t move your money between several – if you can keep track of it.
One option works like this:
- Choose a high-interest current account: our guide on best high interest bank accounts can help.
- Check how much cash you need to deposit each month: you’ll need £1,000 a month for the Nationwide FlexDirect account, for example, but only £500 a month for TSB’s Classic Plus.
- Hold the maximum balance that will earn interest: most accounts have a cap; for instance, Bank of Scotland’s Classic with Vantage account pays 1% AER on balances under £3,999.99 and 2% from £4,000 to £5,000.
- Transfer money between accounts: ensure you hit the minimum monthly deposit for each account every month – you could set up a standing order so this happens automatically.
In practice, say you opted for the Nationwide FlexDirect account. This pays 5% AER on balances up to £2,500 as long as you pay in at least £1,000 a month.
Then, let’s say you also opened a TSB Classic Account, which you’d need to pay £500 into each month, and earn 3% AER on balances up to £1,500.
To benefit from both accounts, all you’d need to do is get your salary paid into the Nationwide account, and set up a standing order of £500 to the TSB account. Transfer anything over the maximum interest-earning balance into a separate savings account, otherwise it won’t be growing.
- Find out more: best high-interest bank accounts
3. Mix it up between long-term and instant-access accounts
If switching money between several accounts sounds too much like hard work, it’s always a good idea to diversify between different types of accounts.
Splitting your cash between an instant-access account and a fixed-term bond will mean some of your savings can earn a better return, while you still have access to some funds in case of an emergency.
Bear in mind that many of the top-rate instant-access accounts include a 12-month bonus rate. This means that the interest rate will drop after the first year, at which point it’s a good idea to swap to a more competitive account.
For an overview of the savings account market and the top-rate accounts, see our guide on how to find the best savings account.
4. Consider a portfolio Isa
Most people no longer pay any tax on savings interest, thanks to the personal savings allowance. But if you’re likely to exceed this, an Isa remains a great home for your money, as any growth is tax-free.
There are a few restrictions when it comes to Isa savings, though – one being that you can only pay into one cash Isa per tax year. This makes it hard to diversify – unless you go for a portfolio Isa deal.
There aren’t many of these on the market, but they have the advantage of letting you split your savings into multiple accounts of different terms during the same tax year, while only officially being treated as opening and paying into one account.
For instance, the Post Office’s Online Isa features an instant-access account, and a one and two-year fixed-term cash Isa. You can pay into all of them in the same tax year, but only up to the £20,000 Isa allowance.
- Find out more: how to find the best cash Isa
5. Max out your Isa allowance early in the year
In each tax year (6 April to 5 April the following year) everyone has an Isa allowance of £20,000.
This is the total amount of money that you can deposit into one or several Isas – you can save the whole lot into one cash Isa, a stocks and shares Isa or an innovative finance Isa, or split it between several different types of Isas.
If you’re able to pay in £20,000 in one year, it’s best to do it as early in the tax year as you can. This way, your money will be earning interest over a longer period of time.
- Find out more: cash Isa rules and allowances
6. Opt for compound interest
You might assume that any interest your savings earn will be paid into the same account, so you can earn the next month’s interest on the growing combined total. This is called compound interest, and it’s the key to growing your savings fastest – but it’s not how all accounts work.
Some savings products will pay the interest into a separate account, meaning you won’t be able to build extra interest on the interest you’ve already earned.
Before choosing a new savings account, make sure you check the terms and conditions to see how interest is paid; if it’s paid into a separate account, it’s worth checking if you can withdraw these returns and re-invest them elsewhere.
7. Beware of regular savings rates
Headline rates on regular savings accounts are often more eye-catching than those on fixed-term accounts, and the fact that they require you to deposit money each month means they’re great for getting into the habit of saving.
However, the caps on the amount you can save each month means the advertised rates aren’t as good as they seem.
For example, opting for a regular savings account that pays 3% AER (the current top rate) and paying in the maximum £500 a month for 12 months would leave you with £6,097.97, which is an effective rate of 1.62% – a return that can be beaten by several one-year fixed-term accounts.
If you have a lump sum to put away, there’s little point in getting a regular savings account on its own.
- Find out more: what are the different types of savings accounts?