How to get a better rate on your savings
The highest savings rates always seem to come with strings attached but it might be worth tying yourself in a few knots to get them.
So-called "zombie accounts", plodding grimly on earning less than 0.1% interest if we're lucky, are barely any different from stuffing cash into the mattress.
Here's how to get that savings house in order, in three steps.
1. Pay off any debts
Except in a few cases - with student loans, for example - paying off a debt can save us much more than moving to the best savings rate would ever make.
This is particularly true, of course, when the debt we're holding has a high interest rate. As an example, let's look at the case of having a £3,000 debt on a credit card - and paying it off over the course of a year - compared with keeping the money in a top cash ISA.
|Credit card: 19% p.a||Cash ISA: 2% p.a|
The returns from even the best tax-free savings accounts are much lower than the interest of a debt like this.
Just paying off the credit card in a lump sum at the beginning of the year would "save" us £250, compared to trying to save while also paying off the card.
For the same reason, it can be worth those with savings who occasionally go into overdraft, especially if it's unarranged, moving cash from savings into their current account to use as an overdraft "buffer".
As well as the interest charged, going into an unarranged overdraft will often cost a set fee - many charge £5 each time. Do that five times a year and that's £25.
£300 in one of the best tax-free cash ISAs over the same period would earn just £6.
Anyone with a loan who's worried about whether or not they'll be allowed to pay it back early should be aware that for any borrowing taken out since February 2011, they've the right to repay early with minimal fees. There's more on that here.
2. Find the highest rates...
and make them work together
After debts are dealt with, there's the small matter of finding the accounts with the highest savings rates and making them all work together.
The best way to do this has traditionally been to start with the highest rate accounts. Put away as much as possible in these - typically hard to reach - accounts, then move on to the next highest, right down to an easy access rainy day piggy bank.
With the introduction of the Personal Savings Allowance (which we explain here), flat rates on traditional savings accounts, and the existence of high interest current accounts, this has been shaken up a little.
Nevertheless, using the savings options on offer in the following order can still make a great deal of sense:
- ISAs: Savers can invest up to £15,240 this tax year, and interest earned on the entire balance is tax-free. We can open a new cash ISA every year, or continue to contribute each year's fresh allowance to an existing ISA - or transfer those across to the new account.
- Fixed rate savings: Often the highest rates available, but taxable - so it's worth knowing how much we can save in them before having to pay tax on the returns. They also require us to lock the money away; the longer we can, the better the rate.
- Regular savings: The highest rates available on easy access accounts tend to be attached to regular savings vehicles - where we must commit to a monthly investment, often of a set amount, for a strong return.
- Easy access on its own: Some of the lowest interest rates around - but good for short-term saving and flexibility.
Let's look at those options in more detail.
ISAs are tax-free and offer reasonable rates of interest compared to many other savings accounts. Brilliantly, anything we invest in them can earn interest tax-free as long as it stays put - so they allow savings to build up nicely over the years.
Since their introduction in 1999, someone saving the full allowance every year would have amassed more than £85,000, before interest.
So it's best to get started with one as soon as we can, even if you can't put away anything like the full yearly allowance - which rocketed from just under £6,000 to £15,000 in summer 2014.
Do note that just because they're tax-free and the money in them can accumulate significantly over time, older ISAs shouldn't be left out when we're subjecting our savings to fresh scrutiny.
Many become zombies, charging meagre rates of interest, after the first year or so - when the money already saved in them could be earning the top interest rates, just like it would in a new cash ISA.
The system allows ISA holders to transfer their existing balances to new deals without any loss of the tax-free benefits: find out more about how the transfer process works here.
Fixed rate savings
Fixed rates can be the calm in the storm for savers.
When we sign up we know that our money will be earning a certain level of interest for a set time or, in the case of guaranteed rates, will always match the inflation rate.
Unfortunately, though, what we gain in security, we lose in flexibility.
These accounts usually only allow a few withdrawals a year, if any, without holder forfeiting the account's benefits (read: having interest withheld).
What's more, to make a withdrawal holders often have to give the provider up to 180 days' notice - which is why instant access savings are sometimes called "no notice" accounts.
These accounts are only suitable, then, for those who can safely stash away a lump sum without needing to touch it.
The best fixed rate savings deals, which lock money away for five years, offer an interest rate of just under 3%.
But the best regular savings accounts offer interest rates of up to 6%.
Why, then, are they only third on our list?
It's because the high interest rate comes with conditions, and it's not available on the full amount that we save.
Rather than earning on one lump sum, account holders will have the interest calculated daily but paid yearly on a balance that they boost by a set amount each month - which means that the returns are limited.
In addition, the accounts offering the best rates require us to have another account with that institution - and some will specify that the deposits need to be made from a particular kind of account.
If we can meet those requirements, we can get a good idea of how much return we'll receive in the end by doing the following: imagine that the final balance of the account is a lump sum; calculate "annual" interest on that using half the quoted rate.
Even taking into account the hoops we may feel they ask us to jump through, looking at the rates offered by the current crop of ISAs and easy access accounts, regular savers still offer some of the best returns on the market.
They also give savers the chance to be rewarded for stowing away even a small sliver of their monthly income.
There's more on how the accounts work in our full guide to regular savers, here.
Easy access savings
For the best returns on a regular savings account, it's best to move the money intended for the regular saver from one of the top easy access savings account.
Given the caveats above, that might mean moving it from the easy access account to another, eligible, account first; this can also help us avoid ending up with all our money in one institution - there's more on why this can be a good idea here and here.
Even for those who just need quick access to their savings to supplement incomes, however, the best instant access deals can still make a real contribution to savings' worth.
Checking savings comparison tables for these deals (ours is here) is a good first step.
3. Automate for the best returns
Finally, having gone to all the trouble of putting your savings into a winning system, it's worth also taking some steps which will ensure that it doesn't fall apart within a few months or years.
Step one: take a new approach to budgeting
"Budgeting" and "failing at" are words we frequently hear together: sticking to a budget isn't easy.
We don't believe budgets are entirely to blame though, more it's budgets that are too stringent or overly complicated that set themselves up to fail because they lack the flexibility to deal with the realities of daily living.
There are, however, plenty of different ways to budget and manage money out there.
We've looked into this more fully in this guide to budgeting, , where we bring together research on which budgets work and which don't, along with some simple spreadsheet templates, and reviews of some automated online management tools.
Step two: start saving by direct debit
A fairly simple place to start is saving by direct debit; it's especially worthwhile for those who can afford to put a little away at the end of every month.
Some current accounts offer a "sweeping" option, in which any money above a certain threshold left in the account at the end of our month is transferred to a linked savings account.
Even these small amounts saved can add up quickly, and as advocates of backwards budgeting, we feel the need to point out that money left in current accounts after essential expenses often ends up being spent.
Step three: set up rate reminders
As we've noted several times above - but as numerous reports and studies continue to show that many of us forget - the best rates often turn into some of the worst once their introductory period is over.
The Financial Conduct Authority found in a 2014 investigation banks really rely on people leaving their savings at a low rate - so help shake things up by moving languishing balances to a more appreciative new home.
The problem is remembering when the rates end.
An email reminder system like the one offered by Google Calendar (look under "notifications" and click "add another reminder") can be set up well in advance to jog our memories; other free services like Memo to Me can continue to hassle us until we've actually switched to a better rate.