By this point in the series you now are familiar with investing and will have enough confidence to explore your options further. For the remainder of the series I want to briefly touch upon boosting cash returns, investing for children & intergenerational wealth and then investing for good which covers ethical & impact investing.
Now you may have got to this point in the series and decided that investing is not for you. That is ok especially if you are very risk averse and accept that inflation is likely to erode the real value of your money over time. Or to put it another way, your money will be able to be less of the stuff you want to buy over time.
Cash is always seen as a starting point of any investing journey but for some people it is ultimately a destination itself. So in this episode I'm going to run through some quick tips on how to boost the interest you can earn on money in a savings account.
Boosting cash returns
Firstly, shop around. Don't just stick with your current bank or building society because it's familiar. Instead, compare rates from different providers to see who offers the best interest rates. Our savings account comparison tables are updated weekly, which show you the best interest rates you can get in the market.
Secondly, consider fixed-rate savings accounts. With a fixed-rate account, you agree to lock your money away for a set period, usually between one and five years. In return, you'll usually receive a higher interest rate than with an easy-access account. However, be aware that you won't be able to access your money during this period, so make sure you won't need it in the meantime.
Thirdly, look out for introductory rates. Some providers offer higher interest rates for a limited time, often six months or a year. After this period, the rate usually drops, so make sure you know what you're signing up for and then diarise to move again once the introductory rate drops off.
Next, consider alternative providers to the main high street banks. Traditional banks and building societies aren't the only options for savings accounts. So-called challenger banks can offer competitive rates, so don't overlook them. Also look at credit unions as a member owned financial cooperative that offers financial services to its members. There are approximately 500 credit unions in the UK and they are generally community or work/trade union based, serving around 1 million members. Some credit unions offer attractive rates of interest.
Also don’t forget to consider high interest current accounts which usually pay a higher interest rate on a portion of your balance if certain criteria are met, such as paying in a minimum agreed amount of money into the account each month. Have a look at regular savings accounts, which are accounts that can pay up to 8% interest when you save a regular amount into the account each month. Normally there is a monthly limit of a few hundred pounds a month.
If the administrative burden of having to shop around and then open multiple accounts doesn’t appeal to you then consider using a cash savings platform a savings platform is an online savings hub that gives you access to a wide choice of savings accounts from a range of banks and building societies in order to maximise the interest you earn, via a single website or 'hub'. Cash savings platforms such as Hargreaves Lansdown’s Active Savings* and Raisin UK* allow you to open and move money between savings accounts at a range of partner banks and building societies using just one login and a click of a button in order to secure a better rate of interest. Make sure you read our article which looks at the best cash savings platforms.
This then brings me nicely onto the concept of a cash savings ladder. Instead of investing all of your money into a single savings bond (for say 5 years to get a better rate of interest), you can use a cash savings ladder to invest in bonds of varying terms to achieve a better average interest rate and more flexibility in accessing your money. The ladder involves investing equal amounts into fixed-rate savings bonds of different terms and reinvesting the proceeds each year in a new bond of the longest term, allowing you to access a portion of your money every year after the first year.
As an aside don’t forget that everyone has a personal savings allowance which for a basic rate taxpayer is currently set at £1,000. This means you can earn up to £1,000 per year in interest on your savings without having to pay tax on it. The allowance is reduced to £500 for higher rate taxpayers and is reduced to zero for those earners that are in the highest tax bracket (known as the 'additional rate'). For most people this will cover the interest they receive on their savings so they won’t pay any tax. It is important to remember that interest earned on savings is liable to income tax so you want to ensure that you legally avoid paying tax where possible. Some people can earn up to £6,000 in interest without paying any tax if they qualify for what is known as the starting savings rate allowance.
Also don’t forget to use your ISA allowance. ISAs (Individual Savings Accounts) allow you to save up to £20,000 each tax-free each year which protects all interest earned within your cash ISA from taxation. While the introduction of the personal savings allowance meant that for many cash ISAs lost their tax appeal, don’t forget that the personal savings allowance could be removed in the future meaning that all money outside of your cash ISAs will then be liable to income tax.
Finally, don't forget that if you are holding a lot of money at a bank or building society you need to know how your money is protected if the institution goes bust. The FSCS covers money held in regulated UK current accounts, savings accounts and credit unions. This means that if your bank, building society or credit union goes bust the money held in your account up to the value of £85,000 per person will be covered and automatically compensated. If you hold a joint account this limit is per individual and will therefore be up to the combined value of £170,000. Any money over the £85,000 limit per individual will not be covered so you may wish to consider holding money over this amount with separate banking institutions.
For example, as the FSCS limit applies per authorised firm you would need to check if your bank account falls within the same licence. HSBC and First Direct bank share a banking licence and so only £85,000 would be covered across both accounts if you hold money in your sole name. You can check which banks and building societies share banking licences on the FSCS website.
Useful links
Please remember, with investing your capital is at risk and the value of investments can go down as well as up, so you may get back less than you invest.
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