How to get a better return on your savings
For many people in the UK, the idea of making their savings work harder is a constant goal. With the cost of living and inflation impacting purchasing power, simply leaving money in an old account that pays little or no interest can mean your savings are effectively losing value over time. Financial journalist Martin Lewis has frequently highlighted this issue, showing that by taking a few straightforward steps, savers can significantly improve their returns, sometimes by several percentage points.
This guidance is not about chasing the highest possible risk for reward, but about understanding the simple, safe actions you can take to ensure your money is in the best possible place. It involves checking your current rate, understanding the different types of savings accounts available, and being aware of your tax-free allowances.
Reviewing your current savings rate
The first and most crucial step is to check what interest rate you are currently receiving on your savings. Many people have accounts they opened years ago, which often default to a very low ‘standard’ or ‘base’ rate after an initial bonus period ends. These legacy accounts can pay as little as 0.1% interest, while the best easy-access accounts on the market may offer over ten times that amount.
To review your rate, simply log into your online banking or check your latest statement. Compare the Annual Equivalent Rate (AER) you are receiving with the top rates listed on comparison websites or financial news pages. The AER is the key figure, as it shows the interest you would get over a year, including compound interest, allowing for a fair comparison between different accounts.
Understanding the different types of savings account
Once you know your current rate, you can explore better options. The right account for you depends on your access needs and goals.
Easy-access accounts: These allow you to withdraw your money at any time without penalty. They are ideal for your emergency fund or money you might need in the short term. Rates on these accounts are variable, meaning they can go up or down.
Fixed-rate bonds: You lock your money away for a set term, such as one, two, or five years. In return, you typically receive a higher, fixed rate of interest for the entire term. The trade-off is that you usually cannot access your cash during this period without incurring a penalty, which could wipe out any interest earned.
Cash ISAs: A Cash ISA is a tax-free savings account. Any interest you earn within an ISA does not count towards your Personal Savings Allowance and is completely free from UK Income Tax. Everyone has an annual ISA allowance (currently £20,000), which you can split between a Cash ISA and a Stocks & Shares ISA.
Considering your Personal Savings Allowance and tax
For basic-rate taxpayers in the UK, the first £1,000 of interest earned from savings outside an ISA is tax-free. For higher-rate taxpayers, this allowance is £500. Additional-rate taxpayers do not get a Personal Savings Allowance. If your total savings interest exceeds these thresholds, you may have to pay tax on the excess.
This makes Cash ISAs particularly valuable for those with larger savings pots, as all interest is protected from tax indefinitely. When comparing rates between a standard savings account and a Cash ISA, remember to consider whether a slightly lower ISA rate might actually provide a better net return after tax.
Practical steps to improve your savings return
Improving your return is often a matter of administration rather than complex investing. Here is a simple action plan:
1. Check your rate: As outlined, this is the essential starting point.
2. Use comparison tools: Look at trusted financial comparison sites to see the best-buy tables for the type of account you need. Always check that the provider is authorised by the Financial Conduct Authority (FCA) and that your money is protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per institution.
3. Consider a Cash ISA: If you haven’t used your ISA allowance for this tax year, opening a Cash ISA can be a smart move for tax-free growth. You can often transfer old Cash ISAs from previous years into a new one with a better rate without losing their tax-free status.
4. Be prepared to switch: There is no loyalty bonus for staying with a poor-paying savings account. Switching to a new provider is usually a simple online process. Be mindful of any notice periods or withdrawal restrictions on your old account.
5. Review regularly: The savings market changes. Make a diary note to check your rates every six to twelve months to ensure you haven’t slipped onto a poor deal again.
By taking these steps, you can ensure your savings are working as hard as they can for you, helping to protect their value from inflation and build a stronger financial foundation. Remember, the best account for you depends entirely on your personal circumstances, including when you might need the money and your tax status.
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Source:
https://www.glasgowlive.co.uk/news/glasgow-news/martin-lewis-explains-how-much-33549163
