15:11 10 November 2012
In recent weeks and months, the nation's savers have been forced to stand by and watch returns offered by banks and building societies drop like a stone.
But while there's nothing anyone can do about this fact alone, why not use the current savings lull to at least ensure your rainy day cash is sitting in the best home possible? Here we take you through where to start, depending on your individual circumstances.
"I'm looking for an emergency cash cushion... "
If you are new to saving and looking to build up a cushion of cash that you can access in an emergency then - just as it says on the tin - you will need an easy access savings account. However, as these accounts are so flexible, the returns are nothing to get excited about.
In fact, relentlessly falling rates have left even the best easy access accounts paying well under 3.00% - and even this rate incorporates a bonus which will typically drop away after the first 12 months.
Easy access accounts
Chelsea Building Society is offering the best easy access account at the moment. Its e-Saver Reward accountpays a gross AER (annual equivalent rate) of 2.60% with no bonus. The account, which is only available online, can be opened with just £1 so encompasses all kinds of savers.
Alternatively, if you are looking for an account to operate by telephone or post, Allied Irish Bank's Easy Access Account Issue 3 pays a rate of 2.50% also in exchange for a minimum investment of £1.
While the savings market has deteriorated, the choice of current accounts that pay decent rates of interest has been improving. This means that, in some cases, it can actually make more sense to hold your money in a current account rather than a savings account.
Take the Halifax Reward Current Account for example. While it doesn't pay interest, provided you pay in a minimum of £1,000 a month, you will receive £5 a month regardless of whether you are in credit or overdrawn.
And from November 2, 2012, you can withdraw up to £500 a day which is well within most savings realms anyway.
Alternatively, Santander's 123 account pays savers interest of between 1.00% and 3.00% depending on your balance (the maximum balance on which interest is paid is £20,000).
To qualify, customers will need to pay in at least £500 a month, set up two direct debits and maintain a minimum credit balance of £1,000. You can find out more about how Santander's 123 arrangement offer works for one MoneySupermarket user here.
It's also worth noting here that First Direct has re-launched its exclusive offer with MoneySupermarket. It offers customers who switch their main current account to its 1st account a cashback reward of £125 - more than the interest you could earn on many savings accounts. You can read more about this exclusive offer in Clare Walsh's article.
Lloyds Classic Account with Vantage is another example of a tiered credit interest arrangement that can trump even the best savings accounts.
You can earn between 1.50% and 3.00% AER (depending on where your balance is between £1 and £5,000) by adding the bank's Vantage facility to your bank account. Again, you also need to stay in credit and deposit at least £1,000 a month to qualify.
For more details on when a current account could prove better than a traditional savings account, have a read of Melanie Wright's article. However, do bear in mind that the October 31 deadline to bag the higher 4.00% tier with Lloyds Vantage has now passed.
But an emergency cash cushion doesn't need to be related to a savings or current account though. If you are a homeowner and already have savings that could be put to better use in light of paltry interest rates, why not consider an offset mortgage?
With an offset, your savings are linked to your mortgage. Instead of earning interest on your cash, the money is set against your mortgage and, as a result, you pay less interest on that debt.
For example, if you had a £150,000 mortgage and £30,000 in savings, you would only be charged interest on £120,000. However, typically your monthly repayments would be based on the larger amount which would have the effect of clearing the debt more quickly.
These days there are some really competitive offset deals available, such as Chelsea Building Society's two-year tracker which is priced at 2.74% if you have a deposit of 30%, although it does come with a hefty £1,695 fee. MoneySupermarket site editor, Clare Francis, looks in more detail at whether savers should get an offset mortgage in her article of the same name.
"I have money I want to lock away for a higher return... "
If you already have cash and are getting sick of the paltry interest rates you are getting in return for your years of hard saving, one alternative is a fixed rate bond.
These accounts pay higher returns than easy access accounts - but of course there's no such thing as a free lunch and, to access them, you will have to forfeit access to your cash for the stated time.
Fixed rate bonds
For example, the recently-launched Coventry Poppy Bond (issue 11) will pay a fixed rate of 3.25% AER for two years.
You can choose for interest to be paid annually or monthly and the account can be opened with £1. You can read more about the deal in Les Roberts' article.
You can lock up your cash for less time than that too though. M&S Bank's One-Year Fixed Rate Savings Account Issue 15, for example, pays an AER of 2.95% for investments of between £500 and £1,000,000. However, this account can only be operated by phone or post.
As well as fixed rate bonds, savers on the hunt for higher returns have been increasingly turning towards peer-to-peer lending.
Also known as social lending, this where the money you invest is lent out directly to consumers who need it (usually in the same geographical area).
By cutting out the commercial aspect of banks, the idea is that the public can borrow for less and, if they are lending, get a higher return on their cash. And again, if you choose to commit your money for the longer term to borrowers, returns will be higher.
In fact, you can earn up to 6.00% or even more on peer-to-peer websites but - especially as they are not regulated by the Financial Services Authority (FSA) - you will need to do your homework first. Read more on the subject in our recent article.
"I don't want my interest to be eaten up in tax... !"
Whichever way you generate returns on your cash, the interest will be classed as income - and, depending on your overall earnings for the year, income is taxed.
While you can't duck out of paying tax, you can legitimately minimise the amount you pay on what you generate in savings returns.
The first step is to get an ISA which, for the tax year until April 2013, allows you to save up to £5,640 without paying tax on the interest. You can keep adding to your balance with every new tax year's allowance and retain the same shelter from the HMRC for all of your cash.
Making sure you use up all of this year's allowance by the deadline of April 5, 2013 and then topping up again with your new allowance is a great way to fight back against general falling returns. Like with any other savings account, you will also need to seek out the best rates.
You can check out the best fixed and variable rates on our ISA channel.
Tax bonuses with offsets
Another tax-efficient way to house your savings is with a previously mentioned offset mortgage. As you will not be earning any interest at all on your savings (instead the cash is working to reduce your mortgage debt), it follows that you will not be paying tax on that interest either.
This makes the arrangement a particularly watertight way to hold your cash - especially for higher rate taxpayers who will be saving more - and comes with the additional perk that you can still get your hands on it at any time should you need to.
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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