14:02 02 March 2013
Savings rates are still in free-fall and with inflation sitting at a stubbornly-high 2.70%, it can feel almost impossible to get the returns you deserve on your cash.
But, with a little homework and innovation, there are some options. Here are five for your consideration:
1. Reap higher returns by foregoing FSCS protection
Tying up your money in a fixed rate bond will typically reap the highest returns on your cash - but even these rates are currently nothing to write home about.
However, there's a new bank on the block which has jumped to the top of the fixed rate bond tables across all three, four and five-year deals.
AgriBank, which is based in Malta but recently opened its doors in the UK, is offering a five-year fixed rate bond paying a market leading AER (annual equivalent rate) of 3.60%, while its four-year bond pays 3.50% and its three-year deal pays 3.35%. All accounts require a minimum opening deposit of £10,000.
This puts clear blue water between AgriBank and the next best five-year fixed rate bond which is from First Save bank and pays an AER of 3.05%. Vanquis Bank's High Yield Bond pays slightly less at 3.01% over five years (though both only require a minimum deposit of £1,000).
But here's the rub. While AgriBank is regulated by the Malta Financial Services Authority (MFSA) and approved by the Financial Services Authority (FSA) over here, it is not covered by the Financial Services Compensation Scheme (FSCS), which would protect the first £85,000 of your cash in the event the bank goes bust. In other words, savers will have to consider very carefully whether they are prepared to sacrifice this security in return for more interest on their cash.
However, as its name would suggest, AgriBank operates in the agriculture market and uses the retail deposits it collects from UK savers to provide loans exclusively to UK-based farmers. And historically in this sector, risk has been very low.
For example, over the last decade, the average default rate on loans to the farming industry stood at 0.30%, according to the bank, and the final loss rate has been 0%. This is because lending is secured against farming machinery which can be repossessed and sold at auction. In short, farmers are a good bet with your cash.
FSCS protection may be top of the list for some savers - especially if the money they are investing is all they have - but others who perhaps already have several other 'pots' could be willing to take the risk and cash in. The choice is yours.
2. Use up your full ISA allowance
According to a poll we ran at MoneySupermarket in late January, 52% of you hadn't used your full ISA allowance for this tax year. But if you still haven't by April 5 (though remember many providers will impose application cut-offs before this date), you won't have the opportunity again as the allowance can't be carried over into next tax year.
You can invest a total of £11,280 into an ISA, with up to half of this (£5,640) being permitted in a cash ISA - the remainder can go into stocks and shares. Or, if you prefer, the full amount can be invested in a stock and shares ISA. (From next tax year, the ISA allowance rises to £11,520 and again, up to half of this - £5,760 - can be paid into a cash ISA.)
In any case, the interest you earn will not be taxed which means you'll get more bang for your buck.
Just as with any other savings account though, you will still need to shop around for the best ISA deal. Some of the most competitive ISAs are fixed rate accounts - and the longer you fix for, the higher your returns will typically be.
Over a three-year term, for example, Halifax is market leader, paying a fixed 2.60% on a minimum deposit of £500. If you hold £5,000 or more in a Halifax (or Bank of Scotland) account for any full calendar month, you will also be entered into the Halifax Savers' Prize Draw, which puts you in line for one of three top prizes of £100,000 every month.
However, if you are lucky enough to have 100 times' this amount (and don't mind operating the account by post) BM Savings has a three-year fixed rate deal too which pays a higher 2.80% tax-free on a fat minimum deposit of £50,000.
There are shorter term fixes, and easy access ISAs available too though, which you can compare on MoneySupermarket'sISA channel - simply type in your requirements.
3. Offset your savings against your mortgage
It's not just increasing the rate attached to your savings account that can help you get the most out of your savings - you can use your cash to soften the impact of any debt instead with an offset mortgage.
With an offset, your mortgage debt is literally 'offset' against any savings you hold in a linked account with the same bank or building society. Some offset deals allow you to link several savings accounts - and even your current account too.
So, if you had a savings account of £10,000, another of £5,000, and a running balance of £4,000 in your current account, that makes a total credit balance of £19,000. If your mortgage debt was £200,000, you would therefore only be charged interest on a debt of £181,000.
There are two main benefits of this offsetting arrangement. As shown above, one is that, as the interest is calculated on a smaller amount, it costs you less. In turn this means the capital is paid off quicker and - without physically paying anything more to your mortgage lender - you will be mortgage-free ahead of schedule.
Secondly, because you don't earn interest on your savings under this arrangement, you don't pay tax on it either - which is especially good for higher rate taxpayers. Many lenders now offer offset versions of all their mortgage deals. They might come with slightly higher interest rates but the margin is narrowing. Check out the latest deals by visiting our mortgage channel and clicking on the offset tab.
4. Lend out your cash instead
Another increasingly popular alternative for savers who are tearing their hair out is peer-to-peer lending, also known as social lending.
This is where you lend your savings directly to consumers (or small businesses) looking for a loan. As this means sidestepping the commerciality of banks and building societies, returns are typically much higher for savers (or 'lenders') while borrowers can benefit by getting their hands on a cheaper rate too.
Zopa, RateSetter and Funding Circle are the biggest peer-to-peer UK websites - and advertised returns on all three are higher than you would find on the high street. Funding Circle (which lends your cash out to small businesses) is currently advertising annual returns of 5.40%, for example (after fees and bad debt), on its variable gross yield account, which requires a minimum investment of just £20.
Again, the drawback here is that peer-to-peer lenders are not covered by the FSCS. That said, each has its own means of managing risk, which you can read more about in my article here. Bear in mind rates were only correct at the time of writing.
5. Consider structured bonds
If you are not comfortable with playing the stock markets but are happy to venture further afield than a traditional savings account in your quest for higher returns, a good half-way house could be a structured bond.
The reason these deals are also known as 'capital-protected plans' is because they promise to give back your full capital investment after a given term, plus a return linked to the performance of a stock market index, such as the FTSE 100.
In short, this means you are able to benefit if stock markets rise - but still get your money back if they fall.
But, as you would expect, there are several catches to this seemingly win-win arrangement. Most of these accounts for example, come with a five or six-year term during which time you cannot gain access to your funds - or you'll face a big penalty if you do.
And, while you will always end up with what you put in, if markets fall over the investment term, your cash may have been significantly eroded by inflation by the end of it.
So long as you have done your homework and are fully aware of these risks - you can see what deals are available on MoneySupermarket'sstructured products channel.
For example, Societe Generale's UK Range 7 Deposit Plan 3 account is advertising maximum potential returns of 7.00% annually over a six-year period - and requires a minimum deposit of £3,000. Returns are linked to the FTSE 100 Index during the term. (You will not be able to transfer an ISA into this account for this year though as the deadline was February 8.)
Investec's Kick Out Deposit Plan 35 operates over a slightly shorter five-year term - also on a £3,000 minimum deposit - and offers maximum potential returns of 4.50% annually. You can choose to have the bond mature as soon as you reach the second year, provided the FTSE 100 is higher than its starting value. Otherwise you will only receive a return of your original capital. The deadline for ISA transfers into this account is March 28.
If you are planning to dip even a toe in the stock market for the first time, it's a good idea to seek financial advice. You should also make sure you have used up your full ISA allowance first and have enough ready cash in the best-paying easy access account in case of emergencies.
And if you are looking for an easy compromise, try just a one-year fixed rate bond - returns are not too bad so long as you shop around. The Co-operative Bank for example has just launched its market leading 1-Year Fixed Term Deposit account which pays an AER of 2.31% over the term on balances between £1,000 and £1million.
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