Finding the right account
It used to be that higher rates were always paid on accounts that required you to tie your money up and give notice before you could gain access, but this is no longer always the case. High rates are often found on internet and postal instant access accounts. And many of these accounts will allow instant access by issuing debit cards. Yorkshire Building Society, for example, issues a cash card with its Internet Saver account, which pays 5 per cent on balances of £1 upwards.
High street banks and building societies often offer the lowest rates for their branch-based accounts, so although it may be convenient to have all your business with one institution, it may not be the best way of getting value for money. NatWest, for example, pays just 1.45 on its Reserve, instant access account. And Nationwide pays just 1.55 on its Cashbuilder account. Both pay higher rates on internet accounts.
Many accounts now come with various rate guarantees and bonuses and many of the current best buys appear in the best buy tables because their rates include a bonus. Abbey’s e-saver, for example, pays 5.10 per cent on £1 plus, but this rate includes a 0.50 per cent bonus for the first six months. So if you go for an account paying a bonus, make sure the rate it pays once the bonus is taken away is still reasonable.
Notice accounts and fixed rates are also available. Kent Reliance and the Post Office both offer a one-year bond paying 5.06 per cent AER and 5.00 per cent AER respectively. If you want to get a higher rate than this, you’ll have to tie your money up for longer. MBNA has a five-year fixed rate bond paying 5.10 AER, with a minimum deposit of £2,500. This will mean that you will miss out on any future interest rate increases.
Rachel Thrussell, head of savings at Moneyfacts.co.uk says: “There are better rates available, as long as customers are happy to lose access to their funds either via a notice period for access or a fixed-term deposit. If they move to one of the options and subsequently need access to their cash, then the interest penalty will wipe out any benefit they would have made on the interest margin.
Switching accounts
It is possible to switch savings accounts to chase rates in the way you might switch credit cards. You could opt for the highest paying instant access account with a short-term bonus, for example, and then switch to another deal once the bonus is taken away. But there is a price to pay for doing this.
When you switch savings accounts there is usually a four-day period when the balance is being transferred, during which time your money won’t earn any interest. Paul Whitlock, savings product manager at Moneyfacts warns that a saver with an average balance of £6,000 would need to leave their money in the new account for at least three months just to break even.
Tax
The headline rates of interest on savings accounts are usually shown gross – ie before tax. In most cases interest will be paid to you net of 20 per cent tax. If you are a 10 per cent taxpayer you can reclaim the difference and non-taxpayers can apply to have their interest paid gross. Higher-rate taxpayers pay a further 20 per cent through their tax return.
If you put your savings in a cash ISA, then there won’t be any tax to pay. If you may need to get at your money quickly, make sure you pick one that has a short notice period or is instant access.
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