04:47 06 August 2013
Savers have struggled ever since the Bank of England slashed the base rate to 0.5% back in March 2009, but there are plenty of ways to boost returns if you know where to look.
Here, we look at some of the options available...
1. Consider non-FSCS savings providers
All savings providers that are authorised by the Financial Conduct Authority (FCA) give savers access to the Financial Ombudsman Service and to the Financial Services Compensation Scheme (FSCS). This provides valuable protection in the event that the savings provider goes bust, paying out up to £85,000 per individual, per banking institution.
However, provided you are prepared to accept a level of risk, some providers which aren't covered by the FSCS offer access to some attractive returns. For example, AgriBank currently pays an annual equivalent rate (AER) of 3.35% fixed for three years on a minimum investment of £10,000. This increases to 3.50% if you tie your money up for four years and 3.60% if you invest for five years.
The bank uses savers' deposits to lend exclusively to UK farmers and agri-businesses, in order for them to buy agricultural machinery and equipment.
AgriBank holds a European banking licence issued by the Malta Financial Services Authority, but its products are not covered by any compensation scheme. This means that if the bank fails, savers will lose their money.
Although this is a major downside, it's worth remembering that historically, risk has been very low in the UK agriculture market. You can find out more about AgriBank here.
2. Lend money to other individuals or small businesses
Another way to boost returns is to actually lend out your savings to individuals or small businesses through peer-to-peer lending websites.
The idea is that you can bypass the banks, so those prepared to lend their money receive potentially higher returns than they might earn from savings accounts.
For example, peer-to-peer lender Zopa offers a protected return of 4.90% after fees if you lend over five years, or 4.50% if you lend over three years. You can lend from as little as £10 to as much as you wish.
RateSetter's 5 Year Income account offers a return of 5.20% on your investment, inclusive of fees. This is repaid in equal monthly instalments, which can either be reinvested or taken as an income.
The minimum amount you can lend is £20 and there is no maximum. Alternatively, RateSetter's 3 Year Income account pays 3.90%, again inclusive of fees, or its 1 Year Bond pays a fixed rate of 2.90% before tax.
RateSetter also offers a Monthly Access option, which only requires a short-term commitment of 30 days. You can earn 2.0% on your investment, and at the end of the month, you can either roll your contract over or withdraw your funds.
Although peer-to-peer lenders are not protected by the FSCS, most providers do operate their own safety nets. Zopa runs the 'Zopa Safeguard' scheme, which is a fund held in trust by a not-for-profit organisation. If a borrower defaults on their loan, the Zopa Safeguard fund will give lenders back the money they are owed. Similarly, RateSetter.com has a Provision Fund, which lenders contribute to via their 'credit rate'. If a borrower misses a payment, then lenders can make a claim through the fund to get their money back.
3. Invest a big sum
Many of the most generous savings rates are reserved for those with a large lump sum to invest, so you may be able to boost the amount of interest you earn by consolidating your savings and putting them into one account.
But don't invest more than £85,000 with any one provider, as this is the maximum amount that is protected per individual per institution by the FSCS.
Among the most competitive accounts is the AA's 3 Year Fixed Rate Savings account, which pays 2.10% AER if you have between £1 and £9,999 to invest, but 2.40% AER if you invest more than £50,000.
Similarly, BM Savings ISA Extra (Issue 5) pays 2.10% AER on balances between £1 and £14,999, but 2.25% if you have £15,000 to invest. These rates include a 12-month fixed bonus of 1.60% for balances between £1 and £14,999 and 1.75% for balances of £15,000 and over, so you will need to move your money after a year.
4. Don't just stick with the names you know
Keeping an open mind when it comes to choosing where to invest can result in higher returns. Often lesser known banks, such as ICICI and Bank of Cyprus, offer generous rates of interest, and still provide FSCS protection.
For example, Bank of Baroda is currently offering a rate of 1.90% AER on a minimum investment of £500 held in its 1 Year Fixed Rate Bond, and is covered by the FSCS scheme. The Bank of Cyprus pays the same 1.90% if you lock your money up for a year, though you'll need £1,000 to put down.
5. Earn more from your current account
If you tend to keep a sizeable balance in your current account, there's no excuse for not earning a decent rate of interest on this cash.
For example, provided you pay at least £500 a month into Santander's 123 current account, and set up two direct debits, you will earn interest on your money. The account pays 1.00% AER on balances from £1,000, rising to 2.00% on balances from £2,000 and 3.00% on balances between £3,000 up to £20,000. You won't receive any interest on balances below £1,000.
This account also pays cashback, so you earn 1.00% back on water, council tax and Santander mortgage payments, 2.00% on gas and electricity bills and 3.00% on mobile, home phone, broadband and paid for TV packages. However, there is a £2 monthly fee to pay.
Another option is the Nationwide FlexDirect Current Account which pays 5.00% AER, but only on balances up to £2,500. After one year, the rate falls to 1.00% and you'll need to pay in at least £1,000 a month.
Alternatively, the Halifax Reward Current Account gives you £5 every month you pay in £750 and pay out at least two direct debits. Find out more here.
From September, switching current accounts will become even easier still under new 7-Day Switch rules, which you can read more about in Rachel Wait's article.
6. Offset your savings against your mortgage
Savers with large balances may get more benefit from offsetting their savings against their mortgage rather than keeping them in a savings account.
Offset mortgages, as the name suggests, enable borrowers to offset their savings against their mortgage, so you pay less interest on your home loan, but still have access to your money in the event of an emergency.
Offset mortgages are especially beneficial for higher rate taxpayers. According to research by First Direct, 40% taxpayers could be £969 better off in just one year with an offset versus an instant access savings account, while 20% tax payers could be £860 better off.
These figures are based on an average instant access savings rate after tax of 0.65% for a 40% taxpayer and 0.87% for a basic rate taxpayer, offsetting £50,000 in savings against a £250,000 mortgage at an offset rate of 2.59%.
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