It can be a hard decision to choose from the many savings options on offer – especially with the nation in recovery from a recession.
The Bank of England cut its base rate in March 2009 to 0.5% – the lowest level on record, and has kept it there ever since, which has had a detrimental effect on the savings market.
Before the recession hit, many savings accounts were paying in excess of 6%, with higher returns paid out on longer term accounts such as fixed rate bonds.
However, in harder times we have been forced to put more thought into making our savings grow, while in most cases keeping risk at a minimum.
ISAs
The first avenue to explore for all UK savers is the Individual Savings Account (ISA). These accounts are like no other, in the way that they allow you to take home 100% of the interest accrued, unlike their savings account counterparts that require income tax to be paid on all earnings.
All UK residents are given the option to save/invest up to £10,680 per year into Cash and Stocks and Shares ISAs. Only half of this allowance can be deposited into a cash ISA, leaving the option to invest the other half into stocks and shares. Alternatively investors can use the full allowance on the stock market, allowing them to avoid the tax man when collecting any returns.
These accounts can be built up over the years to create a tax free haven, so it pays to leave your savings alone – if you withdraw any of your funds you cannot replace them. Savers have the option to move their ISA funds to other providers (if the provider accepts previous funds), but it is important to leave the new provider to transfer the funds.
It’s a good idea to stay on top of your ISA, as the best rates tend to come with introductory bonuses that expire after 12 months. Changing providers is easier than you might think, so it may be a good idea to move around once a year (unless you have fixed a term) to chase the top offers.
Fixed Rate Bonds
The best interest rates are generally offered on longer term accounts, as these require savers to cut off access to their funds in exchange for an improved return. While these account are seen as ‘low risk’, savers must be willing to gamble their interest – as the name fixed rate bonds suggests, the rate paid on your funds will remain the same until the bond expires.
If you locking in low and rates began to rise, you would be left behind earning a low rate of interest.
On the flip-side, this can also have its benefits, as if you are lucky enough to lock in on a rate when interest rates peak, you can enjoy the agreed rate despite other accounts cutting their rates.
It can pay to keep an eye on interest rates and not go for a term of several years when rates are low. It can sometimes be difficult to predict the direction of rates, so stay on top of your strategy. For example, many savers may have chosen against fixing their rate after the base bottomed out, but the fact is that they could have been earning half decent rates for the last 2 years.
