With the average savings rate well below the rate of inflation, it can be tricky to know where to put your money. Here are six ways to get a top rate of interest on your savings
Rock-bottom interest rates and the lack of competition among the big banks means savers face a battle to get decent returns from their cash.
With most savings accounts paying less than the rate of inflation, millions of savers are seeing their cash gradually eroded.
While the Bank of England raised interest rates in August for the second time in 10 years, most banks have been unwilling to pass this on.
But with a bit of creativity, there are ways to boost your savings rates.
1 Earn up to 5% using a regular savings account
Unlike conventional savings accounts, these require you to put something away each month into your nest egg. However, also unlike conventional accounts, they pay up to 5% interest – considerably more than the average easy-access or fixed-rate deal.
Offering some of the best rates on the market, they are ideal for someone looking to start saving or with a sum that they are happy to drip-feed into an account every month.
Watch out for the details though: some only offer the headline rate for a year or require you to be an existing customer.
Usually you can pay between £10 and £250 every month over the period of a year.
You will be penalised if you fail to make a monthly payment, so you have to make sure you have regular money going in.
The First Direct Regular Saver offers an interest rate of 5% for deposits between £25 and £300 a month, allowing you to save a maximum of £3,600 a year. The rate is fixed for 12 months and is only available to current account customers.
There are other accounts that pay 5% interest, but they are more limited in the amount you can deposit.
These include the Nationwide Flexclusive Regular Saver (allows deposits of £1 to £250), HSBC Regular Saver (£25 to £250), M&S Bank Monthly Saver (£25 to £250) and Santander 123 Regular eSaver (£1 to £200).
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2 Save into a current account
Some current accounts pay higher interest rates than conventional savings accounts.
The best high interest current account out there is the Nationwide FlexDirect, which pays 5% interest on balances up to £2,500 for the first year, but this then drops to 1%. There are no monthly fees, but you have to pay in a minimum of £1,000 a month.
Another option is the TSB Classic Plus, which offers 5% interest on balances up to £1,500, provided you pay in £500 a month. Tesco Bank Current Account offers an attractive interest rate of 3% on balances up to £3,000, but you must pay in at least £750 a month.
With rates so poor on the high street, savers are turning to newer banks
3 Try out a challenger easy-access account
With rates so poor on the high street, many savers are now turning to challenger banks, which have sprung up in recent years and are offering better rates.
Most recently, we have seen the launch of Marcus by Goldman Sachs with its market-leading interest rate of 1.5%. Other easy-access accounts offering a higher than average interest rate include the Virgin Money Double Take E-Saver Issue 9 at 1.45% and the Shawbrook Bank Easy Access Account at 1.4%.
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4 Save through a savings platform
Savings platforms can be a good option as they make it easier to switch savings accounts and earn better rates of interest.
They move your money around between different savings accounts on your behalf, making sure that you get some of the most competitive rates at any time.
They also spread out your money so you won’t have more than £85,000 saved with any one firm. This is the limit up to which your money is protected under the Financial Services Compensation Scheme, should your savings provider go bust.
Some providers pay a bonus to savers when they open an account. Raisin pays from £20 for those depositing between £10,000 and £19,999 and £80 for depositing £40,000 to £85,000.
If the bonus is added to the interest paid out, it amounts to a significant boost. For example, if you put £40,000 into the best two-year fixed-term deposit listed – currently 2.14% with Gatehouse Bank, and added the £80 bonus, this works out as the equivalent of a 2.34% interest rate.
Raisin, Hargreaves Lansdown and Octopus Cash all offer savings platforms that require a minimum deposit of £1,000.
“An offset mortgage ensures you can access your cash if you need it”
5 Choose an offset mortgage
An offset mortgage can help you save money on interest payments on your mortgage and even reduce the term.
If you have savings and a mortgage with the same lender, you can use the savings to reduce – or offset – the interest you are charged, which can save you thousands of pounds over the long term.
So how does it work? Let’s say you have got a £200,000 mortgage at 3% interest and put £20,000 of savings into a linked account.
With an offset mortgage you will only pay interest on your mortgage balance minus what you have saved.
So in this case, instead of paying interest on £200,000, you would only pay on £180,000 – a saving of £600 a year.
Interest rates for offset mortgages are typically higher, so unless you have a lot of savings it might not be worthwhile. Payments may rise if you take money from your savings.
David Hollingworth of mortgage broker London & Country says: “An offset mortgage could offer the best of both worlds, as it gives the same effective return on the cash savings as overpaying but ensures that the cash is readily accessible if you need it. For example, those who receive a bonus payment can pay that into their offset account to reduce their interest bill but know that they can still draw on the cash as and when they need it.
“As there is no interest paid on the cash there is no potential income tax liability, so you effectively earn the mortgage rate on the savings.”
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6 Current account ping-pong
Several current accounts offer a rate of interest far superior to those on the best savings accounts. However, they require you to make a minimum payment into the accounts every month.
There is a way around this: current account ping-pong. This involves bouncing money between different current accounts to take advantage of the in-credit interest and give you access to any linked savings accounts that require monthly deposits.
The Nationwide FlexDirect and the TSB Classic Plus both pay 5% interest a month and require a minimum payment of £1,000 and £1,500 a month respectively.
In order to get around this, you can set up a standing order between each of your accounts so that you are paying the minimum each month and getting the maximum interest for your savings.
What you do is pay money from your main account into one of your current accounts with a standing order. Once this has been paid, you then use a standing order to pay money into another current account.
By setting up standing orders that cycle money between them, you can keep the bank accounts topped up to the limit while getting the full benefit of the interest.
This process continues until the money goes back into your main account, each time making sure you pay the minimum interest and meet the minimum pay-in that most banks require to access these deals and get the maximum interest rate.
Current accounts also have limits on the amounts of savings that interest is payable on. With the Nationwide FlexDirect, interest is only payable on the first £2,500 while with TSB Classic Plus it is £1,500.
To get these and an even better rate, you can add more accounts to the system. However, some accounts, such as the Tesco Bank Current Account, may require you to have direct debits in place.
Savings rates correct as of 20 November 2018. For latest rates, visit Moneywise.co.uk/comparison-tools.
“It means we could borrow money for nothing”
Jeff Willmore, 66, and his wife Anna took out an offset mortgage with Coventry Building Society in 2013 and are more than happy with it. They live in a four-bedroom property worth £500,000 in Oxfordshire.
Jeff says: “Because we were coming towards the end of our working lives, we put some money by. I had just taken early retirement from another job and had a lump sum of money.
“Rather than paying off the mortgage, Coventry Building Society suggested using the offset to sit alongside the mortgage as that would give us a certain degree of flexibility. It effectively meant we could borrow money for nothing.”
He says that one of the biggest advantages is they can spend savings whenever they want to.
“We did use the offset as an instant-access account as well. There was once or twice when I needed to do some work on the house and I would just dip into the offset while I transferred and didn’t incur penalties on other bits of money.”
He says they are able to pay off their mortgage more quickly.
“The term of the mortgage was originally due to end at the beginning of 2022, but we should have it paid off by the end of the year now.”
This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
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