The savers in Britain are in dilemma. The banks and building societies are not keen to have your money. Even the Chancellor's Isa reforms are of much relief. Since the banks have been flooded with savers' cash, they have slashed the interest rates. But they offer attractive rates if you are willing to put your money in certain type of accounts. Following tips will help ensure you beat the banks at their own game.
- Ditch your Isa for a high-interest current account. Forget the idea that Isas were meant for savings and that current accounts pay nothing. The top rate on an easy access Isa today is a miserly 1.5pc, but savers could earn up to 5 pc with a current account. These rates come with certain caveats. Nationwide's FlexDirect account, for example, offers 5 pc on balances up to £2,500 for the first 12 months only. After this time the rate falls to just 1pc. Lloyds Bank pays 4 pc on balances between £4,000 and £5,000, but account-holders will have to fund the account with £1,500 a month, or be charged a £5 monthly fee.
These stipulations are relatively easy to overcome. And the result is a substantially higher annual income. Putting £15,000 in the top easy access Isa (1.5pc) will accrue interest of £225 a year. Putting the same amount into Santander's 123 current account (3 pc) will earn interest of £336 a year, after basic-rate tax and a £2 monthly fee is deducted. Higher-rate taxpayers would earn £246.
Some ingenious savers are boosting their incomes by opening several current accounts and feeding the money through each one to make up the monthly deposit requirements. This requires a considerable amount of time and effort, but only in the early stages. Once the accounts are opened and a series of regular payments is set up, you should be able to sit back and count the interest as it trickles in.
2. Put cash into NS&I’s three-year pensioner bond and then take it out after just 12 months. National Savings & Investments’ “65+ Guaranteed Growth Bonds” pay the highest rates on the market for those who are aged over 65. The one-year bond pays 2.8 pc and the three-year bond pays 4 pc. But the drawback is that these pensioner bonds pay interest only at the end of the term, so savers who want the 4 pc rate must wait three years before they see any returns on their cash.
There is a sneaky way of getting around this, that will mean savers earn slightly less than 4pc but will still receive more interest than they would on the one-year bond.
It works like this. If you invest £10,000 into the three-year pensioner bond, in the first year you would earn £320 after basic-rate tax is deducted. Withdrawing this money after 12 months will incur a penalty of 90 days’ loss of interest, which equates to £79. If you deducted this, the total interest earned would be £241.
That is equivalent to a rate of 3.01pc, before tax, and so still beats the rate offered on the one-year bond. After 12 months, the one-year bond would accrue interest of £224. This is £17 less than the three-year bond.
3. NS&I pensioner bonds: you can get monthly income
If 12 months is still too long to wait to see a return on your cash, then income seekers need not worry. With a little effort, you can get 4 pc with NS&I's three-year pensioner bond, on the majority of your savings and still receive the monthly income you need.
What you do is split your savings into four pots. The first goes into an instant access account to meet your monthly income needs in the first year. The second pot is invested in a one-year bond; this is then available to provide the income you need in the second year. You repeat the process with a two-year bond (or Isa) for the third year. The final pot – the largest – is simply invested in three-year pensioner bonds and is not called on to provide any of the monthly income. It sounds complex, but our guide here takes you through the plan in detail.
4. Build a rolling fixed-rate bond portfolio
Typically, a fixed-rate account will pay more interest than an easy-access account. In exchange for a higher rate, banks will ask you to tie up your cash. Generally, the longer you give up access, the higher the return. But why wait five years for your income? Take out one five-year bond now, another next year, and another the year after. Keep doing this and you’ll have a rolling fixed-rate bond portfolio consisting of different five-year bonds maturing in consecutive years. In the past, when NS&I was still selling index-linked certificates, this is how many canny savers chose to invest.
5. Use a regular savings account in tandem with a top-paying easy-access account
"Regular savings" accounts offer unbeatable rates, but the accounts come with a list of conditions that mean many forgo opening one. First Direct and M&S Bank, for instance, pay 6 pc to those who pay in at least £25, and no more than £300, each month. But customers who open a regular saver with either bank must also hold or open a current account with the respective provider. Moreover, the rate is typically offered for the first 12 months only, after which the money will be transferred to a low-interest account. Customers can, however, take out another regular saver after this time and start the process again. Regular savers used in tandem with a top-paying easy-access account can be highly profitable.
