Getting a decent return from your savings takes more than putting money in the first account you come across. Choose poorly and you won't come anywhere near to securing the best rate, and if you get complacent, you could even end up with a lower rate than you started with. So just how can you get the best returns from your savings? We've come up with a few tips to help you out.
The sensible starting point is to decide what kind of savings account you’re actually looking for. Are you happy to lose access to your money, for example, or do you want to be able to add and withdraw from your pot whenever you wish? It’s worth bearing in mind that the best returns tend to be reserved for those who are willing to lock their money away, but if you simply want the best possible rate while having access to your money, you’ll know to look accordingly.
Once you know what you’re after, you can start searching, making sure to compare the options thoroughly as you go. After all, if you don't shop around, how will you know if you've got the best deal? There are so many different savings accounts available that the time spent researching could pay dividends, because those few extra minutes could make a world of difference to your savings pot.
While securing the best rate will be at the top of your agenda, you’ll want to pay attention to the details of the account as well, such as opening or withdrawal restrictions, so you can be sure you've got an account that suits your needs. Don't always opt for the big names either – high street banks tend to offer lower rates than their lesser-known alternatives, so make sure to consider these challenger banks when making your selection. They come with the same kind of financial protection as their mainstream counterparts, too.
While you'll always need an easy access savings account for that all-important emergency fund, if you're saving up for something specific or have a lump sum you want to grow over the next few years, you could do well to opt for a fixed rate version instead.
Fixed rate accounts invariably offer higher rates of interest than their easy access counterparts, on the provision that you lock your money away for a set amount of time. They typically don’t allow further additions and rarely allow access before the end of the term, so you’ll need to be truly committed to take the plunge. But if you're comfortable with making that kind of commitment, it could be a great way to see your balance grow.
If you’re saving in a fixed rate bond, the only time you’ll need to review your rate is when the bond matures and you’ll need to decide what to do next with your savings. However, if you’re earning a variable rate of interest, you’ll need to be a bit more vigilant. Not only do variable savings rates have the potential to change at any time, but some come with an introductory bonus that will fall away after 12 months, which could see your return drop significantly.
For this reason, you’ll want to review your rate on a regular basis, and at the very least annually, to make sure you’re getting the best returns possible. The beauty of variable rate accounts is that you’re not tied in, so if you’re not getting the rate that you want, you can switch!
Only consider fixed rate bonds if you are truly comfortable with losing access to your money, and if you’ve got more accessible funds available elsewhere. If you’re still on the fence, look for a fixed rate account that offers earlier access should the need arise – some do, but you’ll typically have to pay an interest penalty for the privilege, though it could be an ideal compromise.
To be truly confident that you’re getting the best returns possible, you need to make sure the taxman isn’t taking a chunk of your savings. Happily, the launch of the Personal Savings Account (PSA) in 2016 makes this a whole lot easier, with savers able to earn up to £1,000 in interest each tax year without having to pay any tax on it. That’s before your annual ISA allowance, too, which is entirely separate from your PSA.
Essentially, as long as you’re not breaching your PSA, you shouldn’t need to worry too much about tax. If you’re lucky enough to have such a significant savings pot that you’re earning more than £1,000 a year in interest (or £500 if you’re a higher rate taxpayer. However additional rate taxpayers don't get a PSA at all), make sure to funnel some of that into an ISA instead – there’s no limit on how much tax-free interest you can earn with these accounts, so the more you save each year, the more you can benefit.
Think a traditional savings account is the only option if you want to save your hard-earned cash? Think again! Increasingly, current accounts are being seen as a viable alternative, with high interest current accounts often paying far more than any standard savings account on the market. For this reason, they’re often used as a kind of easy access account, with savers able to earn a high rate of interest without losing access to their cash.
The only caveat to this is that most high interest current accounts will come with certain restrictions, such as a minimum monthly funding requirement or a limit on how much of the balance will earn interest. But, when you could earn up to 5% on a portion of your savings, this type of account could be a valuable addition to your savings portfolio.
Another alternative could be a regular savings account. These accounts typically pay much higher interest rates than their traditional counterparts, but there are far more restrictions in terms of how, and when, you can save. You’re generally required to make a set monthly payment which is usually capped: there’ll be a maximum amount you can save each month and for the length of the term, with regular savings accounts typically lasting around 12 months.
Bear in mind that some will penalise you for missed payments and won’t let you access money before the end of the term, so make sure to check the terms and conditions before you apply. That said, regular savings accounts generally pay the highest rates of interest among cash savings accounts, so could be worth considering, particularly for those looking to get into the savings habit.
If you're comfortable with an element of risk, it could be time to take things up a notch. Stocks & shares ISAs, for example, have the same tax benefits as their cash-based counterparts but offer the potential for much higher returns, with the caveat that your investment could be at risk if your chosen stocks don't perform well. It's a definite trade-off, but if you've got that kind of risk appetite, it could be a great way to maximise your returns.
The value of a stocks & shares ISA can go down as well as up, which means you may get back less than you put in. As such, you’ll need to be comfortable with taking an extra level of risk with your money. Remember, too, that your returns are based on the performance of your chosen funds rather than a set interest rate, though this also gives the potential for returns to be far higher than standard interest rates can offer. Make sure to seek advice if you’re unsure.
You can find out more by reading our stocks and shares ISA guide and our guide to Why do regular savings accounts seem to pay the highest rates?
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.