Due to incredibly low interest rates set by the Bank of England (its currently 0.25% which is like a record low) it’s not the greatest time to save money in your bank account. Getting a reasonable return from any bank can be a challenge.
Despite this there are still many ways you can. Here are my 5 top tips to ensure that your money is working as hard as possible for you…
1. Know about your Tax benefits
It’s one of those compulsory things in life but I am sure, along with myself, no-one enjoys paying tax and seeing all those deductions before you arrive at your net pay. But yeah it’s just got to be done.
The personal savings allowance introduced by the UK government in April 2016 means basic rate taxpayers can earn up to £1,000 of interest from savings a year without having to pay any income tax. This includes peer-to-peer and current accounts. If you are a higher rate tax payer you can only earn up to £500.
There are also some other tax breaks (we all like those) such as saving using this 2017/2018 tax year’s ISA allowance of £20,000 up from £15,240 from last year (thank you taxman). Remember any interest you earn from cash ISAs will not count towards your personal savings allowance.
You can slice up your £20k ISA allowance by having a cash ISA, stocks and shares ISA, and peer-to-peer investments via the newly launched Innovative Finance ISA. I would recommend the last two if your looking for a better interest rate although be aware of the associated risks.
2. Fixed rate account pays more interest
Fixed rate accounts usually offer higher savings rates as you have to agree to leave your money untouched for a pro-longed period of time. This is partly so the banks can use the money to lend to other people who need it without the risk of bankruptcy. Therefore the longer you agree to lock your money away for, the more interest you’re likely to earn. So why not check out:
Charter Savings Bank, for example, offers 1.77% AER fixed for one year, so long as you open the account with at least £1,000. However, if you can manage without the money for a bit longer then, Paragon Bank pays 2.45% AER fixed for five years. Again, you will need £1,000 to open the account. You probably have not heard of these banks before and nor did I before I did my research but they are all legit and have obtained their banking licence from the FCA. Typically the new entrants try to incentivise new customers with such offers so its all good!
A word of caution though. Be mindful of locking away your money for too long in case interest rates rise (which they might do soon) and your money is tied up in an account which becomes the worst on the market. Also be sure that you can afford, especially in the case of emergencies, to have no access to your money for such a long period of time.
3. Earn interest on your current account
Nowadays current accounts can be a better option as compared to specific savings accounts as you always have access to your money and you’re likely to earn a higher rate of interest.
Below are some pretty decent accounts currently being offered in the market:
The Santander 123 current account, for example, pays 1.5% AER (variable) on balances up to £20,000. If you like seeing a lot of money in your account and want easy access this one might be for you.
To qualify, you will need to pay in at least £500 a month, have at least two active direct debits on your account and pay a £5 monthly fee. You will also earn cashback of up to 3% on some of your household bills. The monthly fee is a bit annoying but if your struggling to find direct debits you can just set up a Paypal or charity direct debit to qualify. Also a great tip is that you can have your own personal account (topped to 20k) and open a joint account (top up to 20k) and your partner can have their own account (topped to 20k too). As the interest is applied to every account then thats what I call team WIN WIN WIN! Great if your setting money aside for a wedding or saving for a house purchase.
If the money in your bank account is not on that scale then no worries. Soon come init. Whilst you build your riches you can check these accounts out:
Nationwide pays 5% AER (variable) on credit balances up to £2500. It is only available for the first year and you have to pay in £1000 a month to qualify.
Tesco Bank pays 3% AER credit interest on balances up to £3,000 until 1 April 2019. To qualify simply pay in at least £750 and pay at least three Direct Debits each statement month. As your debit card is also your Clubcard, those of you that actually shop at Tesco will benefit even more because for every £1 you spend on your debit card at Tesco, you’ll collect 2 Clubcard points until 1 April 2019. That’s twice as many points as you’d normally get with a Clubcard.
Alternatively, the TSB Classic Plus account pays 3.00% AER (variable) on balances up to £1500. You must pay in at least £500 a month and register for internet banking, paperless statements and paperless correspondence. You will also earn £5 cashback every month just for having two direct debits per month. Plus another £5 cashback every month if you spend with your debit card at least 20 times a month.
The good thing about this one is there is no monthly fee and you don’t need an enormous amount coming in every month to qualify!
4. Build up an emergency fund
I personally recommend trying to save up between three and six months’ salary in an instant access account. This is so that you have a financial buffer in the event of an emergency. For example if you lost your job today (God forbid) then you can continue to keep up with your monthly commitments.
Unfortunately, interest rates on instant access accounts offer next to nothing, but it’s still important to have an emergency savings cushion to fall back on if ever needed.
Virgin Money’s Defined Access E-Saver pays 1.01% AER (variable) on balances of £1 or more. However, if you make four or more withdrawals in a calendar year, the rate falls to 0.25% AER (variable) until the end of the year. If you are super good at deciphering your money then an emergency fund can be achieved by using a current account as explained in tip three!
5. Consider peer-to-peer
My final tip is rather new and emerging and demand has increased especially over the last five years or so. Its called peer-to-peer (P2P) lending where you lend directly to individuals, sole traders and small businesses without the need of going through a bank. Because of this you can boost your savings by earning higher returns than with a traditional savings account. P2P savings can be also held within an Innovative Finance ISA, meaning you won’t pay income tax on your earnings.
For example, the current estimated return with Funding Circle is 7.5% a year, after fees and bad debt. According to Funding Circle since 2010 72,003 investors have lent £2.7bn, earning £135million in interest. Not bad at all! Also if your feeling patriotic then most of your money will be supporting British businesses.
Sounds good but another word of caution. P2P saving means your money won’t be covered under the Financial Services Compensation Scheme which protects the first £75,000 of your savings should your bank or building society go bust.
However many lenders have compensation arrangements of their own so its best to check each one out before you decide to go for it. So yeah there you have it my five essential tips for savings. As always let me know how you get on!
Please feel free to email me at email@example.com for any specific questions. You can also get in touch on social media or email me for any of my consultancy services such as one-one financial coaching or for financial seminars and workshops.