12:22 08 January 2013
Whether you are new to the savings game or simply chasing the best returns for your existing cash, don't be disheartened by the low returns you see on offer.
Instead get clued up on how to maximise your savings returns. Here, we look at some of the best options available, whether you need immediate access to your cash, or if you can afford to tie your money up for the longer term...
Beware 'New Year offers'
Savings providers often launch new accounts with a fanfare in the New Year, but rates are often not the best available.
For example, Santander has just launched a new range of competitive 1 and 2 year Fixed Rate Bonds paying annual equivalent rates (AERs) of up to 2.40% which are available in branches, by telephone and online.
The one-year bond pays 2.00% AER on a minimum investment of £500, while balances over £200,000 earn a higher rate of 2.10%.
The two-year bond, meanwhile, pays 2.30% on a minimum investment of £500, rising to 2.40% for balances of £200,000 or more.
Santander is also offering an 18-month fixed rate bond, which is available only to new and existing Santander 123 Current Account or 123 Credit Card customers. The bond pays 2.50% AER if you are investing £500 or more and2.60% on investments of £200,000 and above.
However, Issue 32 of Virgin Money's one year Fixed Rate Bond currently pays 2.40% AER and can be opened with a minimum investment of just £1. This account can be operated by post, in branches and online. Similarly ICICI Bank's HiSAVE 1 year Fixed Rate account pays 2.49% AER on a minimum investment of £1,000. This account can only be operated online.
Alternatively, Bank of Baroda's one year Fixed Rate Bond, which is exclusive to MoneySupermarket, pays 2.30% AER on a minimum investment of £500.
If you can afford to tie up your money for longer, then FirstSave is paying 3.05% AER on the first issue of its Five Year Fixed Rate bond, which can be opened with a minimum investment of £1,000. This account is online-only, so won't suit savers who require branch or telephone access to their savings.
BM Savings pays 2.80% AER on its five-year Fixed Rate Bond, but only if you have £50,000 or more to invest. Balances of £10,000 up to £50,000 earn a lower rate of 2.60%. This account can only be managed by post.
Make the most of tax-free allowances
One of the best ways to ensure your money is working as hard as possible for you is to make use of your annual tax-free individual savings account (ISA) allowance.
The maximum you can hold in a cash ISA in the 2012/13 tax year is £5,640. Next tax year, 2013/14, the cash ISA limit rises to £5,760.
The current best buy variable cash ISA is Coventry Building Society's 60 Day Notice ISA, which can be opened with just £1 and pays an impressive 3.10% tax-free, while M&S Bank's Advantage Cash ISA pays 2.75% tax-free on a minimum investment of £100.
Other competitive ISA accounts include ING Direct's Cash ISA, which pays 2.25% tax-free on a minimum investment of £1, and can be operated online and by telephone. The rate on this account is guaranteed for 12 months, so you may want to move your money at the end of this period.
Alternatively, Danske Bank's Cash ISA, which can be opened with just £10, also pays 2.25% tax-free, but only on funds invested this tax year.
An alternative way to maximise your savings returns this New Year is to consider peer-to-peer lending. As the name suggests, this involves people lending to other people, therefore cutting out the need for banks to be involved.
The aim is that those who are willing to lend get higher returns than they would if they deposited their money in a conventional savings account, and in turn the individuals they are lending to get lower cost loans than they would if they borrowed through a bank.
For example, if you signed up to RateSetter's 3 Year Income Plan and commit to lend for three years, you could earn 5.00% on your investment, repaid in equal monthly instalments, which can either be reinvested or taken as an income. This rate is inclusive of fees, which are equivalent to 10% of the interest you receive.
The minimum amount you can lend is £10, and there is no maximum.
Alternatively, investors can currently earn an average gross yield of 9.10% by lending through Funding Circle, which lends to small businesses. The minimum amount you can invest is £20 and there is no maximum.
However, remember that the returns you will actually achieve will depend on the rates you choose to lend at, the risk grade of the businesses you lend to, and any losses you might experience. There is also a 1% annual servicing fee, based on the amount outstanding on each loan part, which is not factored into the average rate you see advertised.
Remember also that with peer-to-peer lending, your funds are not protected by the Financial Services Compensation Scheme, although most have very low annual bad debt rates.
Earn more from your current account
Although many current accounts pay no interest at all when you are in credit, there are a few which provide decent returns when you are in the black.
Santander's 123 current account, for example, pays savers interest, but you need to agree to pay in at least £500 a month, set up two direct debits and maintain a minimum balance of £1,000 to qualify.
If you are able to meet these criteria, then with a rate of 3.00% paid on balances from between £3,000 up to £20,000, returns are again higher than any easy access savings account currently available.
Balances between £2,000 and £3,000 earn a lower rate of 2.00% AER, while if you have between £1,000 and £2,000 in your account, you earn 1.00% AER. You won't receive any interest on balances below £1,000.
Another advantage of this account is that it also provides cashback, so you earn 1% back on water, council tax and Santander mortgage payments of £1,000 or less, 2% on gas and electricity bills and 3% on mobile, home phone, broadband and paid for TV packages.
The biggest downside is that the account has a £2 monthly fee, so you will either need to keep a large balance in it to maximise the interest you earn, or make sure you spend enough on the bills outlined above to earn sufficient cashback to cover the fee.
Alternatively, The Lloyds TSB Classic Account with Vantage pays 3.00% AER in-credit interest on your whole balance if you have between £3,000 and £5,000 in your account, but you must pay in £1,000 a month.
Another way to give your finances a boost is to move your current account to First Direct, which pays £100 bonus when you switch, provided you pay in at least £1,500 a month into the account.
Although the First Direct current account doesn't pay any interest when you are in-credit, it does give accountholders access to a Regular Saver account paying a massive 8.00% AER. You must pay in between £25 and £300 a month into the Regular Saver account to qualify.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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