Page last updated at 23:52 GMT, Tuesday, 10 February 2009

Making the most of your savings

Money Talk
By David Black
Banking consultant, Defaqto

David Black
David Black

The massive fall in the Bank of England's base rate, from its recent peak of 5.75% back in November 2007, all the way down to 1.00% this February, has hit savers particularly hard.

The result has been that those dependent upon interest from savings accounts, to provide or supplement their income, are facing desperate times.

There is no escaping the fact that interest rates are low.

But there are a number of tactics that savers can use to improve their lot.


The first thing is to use your individual savings allowance (ISA).

For taxpayers, the advantage is that the government will not get its hands on 20% (or 40% for higher rate taxpayer) of your interest.

You can invest up to 3,600 in a Cash ISA each tax year.

Even if you are likely to need to dip into the funds it is still worth doing.

But do make sure that you choose an ISA with withdrawal conditions that suit your requirements.

If you are a non-taxpayer make sure that you register to receive gross interest on all of your savings accounts by filling in an R85 form, which your bank or building society can supply.

Fixed rate bonds

It may be worth transferring some of your money to a fixed interest rate bond.

Many of the accounts that currently nestle in the "best buy" tables are newly launched accounts

But make sure that you only do this if you are certain that you will not need to access the funds during the entire fixed rate period.

Some bonds will not allow withdrawals during the term, whereas others may be subject to relatively penal terms.

Interest rates on the "best buy" fixed rate bonds can be higher than those available elsewhere.

If you have had the same variable rate savings account for quite a while it is worth checking to see whether you can get a better deal elsewhere.

"Best buys"

Many of the accounts that currently nestle in the "best buy" tables are newly launched accounts.

Piggy bank, cash and cards

Many savings accounts get into these tables by offering ever higher introductory bonuses.

If the terms of the account suit, take advantage of these accounts.

But make sure that you diarise when the introductory bonus ends, so that you remember to shift your funds elsewhere at the appropriate time.

If you have spare cash to invest every month it may be worth considering a regular monthly savings account.

With these you invest a fixed sum, typically between 20 and 250, every month for a year, in return for which some providers are offering an impressive interest rate.

Feeder accounts

Quite a few of the highest deals are only available if you take out, or have, another specific account with the same provider, and very often this will be a specific current account.

It is now very easy to keep abreast of the best deals available

If funds permit there is nothing to stop you opening several of these accounts with different providers.

Perhaps surprisingly, some current accounts offer high rates.

But these will generally require you to pay in a minimum amount each month - typically 500, 1,000 or 1,500 - so realistically you would have to pay in your salary or pension every month.

The high rate is generally limited to balances under 2,500 and is also often restricted to the first year.

Some current accounts even give new customers a "golden hello" of up to 100.

Check out the terms of any account before you open it, as many accounts have restrictions on the number of withdrawals, or even charge a penalty on all withdrawals.

Make sure that you are happy with the conditions before investing because if you exceed the stated number of withdrawals you will not obtain the headline interest rate cited.

Offset and cash-back

Higher rate taxpayers with a mortgage and a reasonable level of savings might like to look at an offset mortgage.

Any savings will earn interest at the same rate as the mortgage and, because the interest is offset against the mortgage interest rather than actually paid out, it effectively earns gross interest.

Historically offset mortgages have charged slightly higher rates than conventional mortgages but there are some very competitive providers.

Credit card users who always repay their entire balance every month could have a look at cash back credit cards.

Some of them offer enhanced cash backs for the first few months and others offer higher cash backs on certain types of spending at specific retailers, such as supermarkets or petrol stations.

If you are disciplined it may pay you to use different cards and take advantage of the vagaries of their deals accordingly.

One good thing is that it is now very easy to keep abreast of the best deals available.

Many newspapers and an ever increasing number of websites carry "best buy" tables across a wide range of different account types.

But never have more than 50,000 in any bank or building society as this is the compensation limit.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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