The top savings account pays 6.5% with instant access and a guarantee the rate will stay high, yet many people still stick with ‘losings’ accounts, those paying less thanc inflation after tax. This is a full best buy guide to maximizing your interest; including a unique calculator which will tell you how much, how long, or how big your savings should be.
When I said ditch your bank...
Where to start saving
Paradoxically, don't start saving with a savings account. First, use any spare cash to Pay Off Debts, which usually cost much more interest than savings pay out. After that consider Cash ISAs, which are effectively tax-free savings accounts, and Regular Savings Accounts, where you put money away each month in return for a higher rate, as both should pay you more interest.
Read a full ‘Where To Start With Savings' article.
Once that's done, use a savings account, which is simply a place to dunk unlimited cash while it's unused, to earn high interest. They have less functionality than normal day-to-day current accounts offering neither cheque books nor, with a few exceptions, cash cards.
How can savings be losings?
Inflation measures the rate prices increase, so if savings don't beat inflation after tax, they're losing you money. An example should help:
Imagine inflation is 10%, meaning things costing a pound this year cost £1.10 next year. Put that pound in a savings account paying 5% interest and, if we forget tax, by next year it'll have grown to £1.05. Thus keeping cash in that account actually reduces your spending power, making it a losings account.
How safe are savings accounts?
Banks are like bridges, they almost never collapse but when they do the splash is huge. All legit UK savings institutions are registered with the Financial Services Authority (FSA), which means they're signed up to the Financial Ombudsman complaints service and more importantly the Financial Services Compensation Scheme.
This means in the ridiculously unlikely event a bank went bust, you'd get every penny of the first £35,000 of your savings per institution back. Therefore, while I think it’s a touch of overkill, if you want total peace of mind don’t put more than £35,000 in any bank; spread it around for safety. Full details of the rules, how to do this, and pros and cons are in the Are my savings safe? article.
What to watch with savingsThe simplicity of savings doesn't stop providers playing tricks:
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Introductory ‘bonus' rates. Temporary interest hikes to attract new customers. For active consumers, as you can shift the cash to a better payer as soon as the bonus ends, it's no problem. However, easy-life seekers should avoid them.
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Suck, slap and flog naming. Some banks suck you in with a high rate, then later slap the rate down, and try to flog another similarly named account so you think you're still earning decent interest. Always know your account's exact name.
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Quoting different interest. Banks quote one of two different interest rates. The Gross rate is the flat amount paid; while the Annual Equivalent Rate (AER) takes into account interest compounded over the year. Check which rate you're being quoted and compare like with like. For a detailed explanation see What's The Difference Between AER And Gross?
Also remember interest rates are usually quoted without tax, but for basic rate taxpayers 20% of the interest earned goes to the taxman; for higher rate taxpayers it's 40%.
The UK's Top Savings
There’s currently a clear winner on rate, paying far more interest than anywhere else. All the following top accounts are either instant access, meaning you can withdraw cash immediately via a branch; or no-notice, which means as it's an internet/phone account, in practice it takes a few days to get the cash in your hands:
The Top Clean Accounts
6.5% from £1,000, online access with strong rate guarantee
The highest paying clean account by a significant margin is Kaupthing Edge* which pays 6.5% AER as long as you have over £1,000 in the account. It also has the best rate guarantee, promising to be at least 0.30% higher than the Bank of England base rate until 1 February 2012, meaning it’ll be a high, if not always top, payer until then.
It has already announced in a press statement that it has no intention of dropping interest rates following the Bank of England rate cut; though it was no more specific than that. My assumption is these means no rate cut for at least a month, and unless UK rates drop again, it won’t drop for the foreseeable future.
Kaupthing is the UK offshoot of a big Icelandic bank, but is fairly new to the UK market so there’s little feedback on its smoothness or customer service yet. However, it is signed up to the Banking Code and crucially your first £35,000 is protected (see the Safe Savings? article) the same as all other UK banks. If you're saving any more than that, you may want to spread savings between more than one account, just to ensure full protection for every penny, so have a look at the accounts listed below.
6.5% if you've less than £1,000, but no rate guarantee.
The Birmingham Midshires e-Saver pays 6.5% on all savings from £1, and is a totally clean, no-notice online account. Yet go quick if you want this, Birmingham Mishires have been known to withdraw accounts rapidly if lots of people apply in a short period.
Beat this if you're prepared to lock cash away. See Fixed Rate Savings.
Specialised alternatives
- 6.5% from another account, but with a short-term bonus
You can match the top rate in a no-notice account but this includes an introductory bonus rate hike. Therefore if you’re willing to monitor the rate and shift your cash to the new best payer when it ends you can spread your cash and earn the same rate.
Alliance and Leicester's* eSaver pays 6.5% AER, yet 0.88% of that's a bonus until 31 May 2009; worse still it pays no interest in any month you make a withdrawal (except July) so only use it if you'll leave the cash there till 1st June 2009, then withdraw it all (do that on the first of the month to minimise the impact).
Abbey* Instant Access Saver also pays 6.5% AER if you've £1,000 or more, this time with a bonus of 1% lasting for twelve months; though watch out, as the rate plummets to 2.75% if your balance drops under £1,000.
- Got big savings and want to spread your money for safety?
If you’re concerned about getting maximum safety on your savings, then, as explained in the Are My Savings Safe? article, you shouldn’t have more than £35,000 in any one financial institution. To do that and still get a top rate, use the next highest paying clean accounts; Firstsave pays 6.26% if you're saving over £1,000, ICICI* HiSave pays 6.16% from £1.
- Do you want a non-web account?
If you have less to save Anglo-Irish Bank's phone or post Easy Access account pays 6.05% AER on all balances from £1. - Want cash machine access to your savings?
The easy way to assure yourself 24-hour access to your cash, is to get a savings account that gives you a cash machine card and allows free withdrawals from any Link machine. Top payer is the Yorkshire BS Internet Saver, with optional cash card, paying 5.7% AER and you only need £1 to open it. The top clean non-web account for this is Bank of Scotland's Instant Access account, also with optional cash card and from £1, paying 5% AER.
The Post Office* Instant Saver requires £500 to open the account and pays 5.75% AER. Yet 1.5% is a year’s bonus, so after that you’d need to ditch and switch, plus it only gives six free cash withdrawals a year, after that it’s £1.
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Fancy looking locally?
All the above rates are available to anyone, yet some small building societies occasionally offer special rates to people who live in the local area, or to existing members; it's always worth checking yours.
To see how switching will affect your savings, use the Savings Calculator and input the interest
All new top savings accounts will be in the free weekly MoneySaving email
How to guarantee a continually top rate
Most savings accounts are variable, meaning the rate can change both with the Bank of England's Base Rate and as providers change their competitive stance. It's important to regularly monitor your account's rate and if it plummets, ditch and switch. Yet there are some alternatives to monitoring interest rates.
Fixed rate savings
With fixed rate savings accounts you get a guaranteed rate of interest for a set period, but you can’t take your money out (without huge penalties). Therefore providing you are happy to lock the cash away for the entire term, they can be a good deal.
Currently there are some huge rates available. This is because many lenders are desperate to get hold of your cash so they can lend it out at high rates during the Credit Crunch . Plus with fixed rates they get surety that you won’t want it back until a defined time, thus allowing them to plan their lending strategies better.
Is it worth getting a fixed rate?
The advantage of a fixed rate is you get surety and know exactly what it’ll pay. The problem, as well as your money being locked away, is that you lose the flexibility to ditch and switch to a better payer if the rate is no longer competitive compared to others.
At the current time, fixed rates look to be very competitive, as they pay more than the top instant access deals and economists tend to be predicting the base rate is on a downward trend.
The Current Top Fixed Rate Deals
One year Deals… 7% AER
The internet based fixed rate savings account, from Icesave pays 7.01% AER on balances above £1,000 for a year.
Only a smidgeon behind at 7% AER is ICICI's one year Term Deposit account and it only needs £1 to open it, though to get this you’ll need to have its instant access HiSave* account, which pays 6.16% AER on balances over £1. This isn’t a problem though, just open it up and move the money across.
For a year long bond which can be opened from £1 without having to transfer it through another account, Birmingham Midshires Direct Internet One Year Fixed Rate Bond pays 6.81% AER or if you’re over 50 Saga pays 6.97% AER on its monthly interest fixed rate savings account.
IMPORTANT. Icesave, unlike some foreign banks (including ICICI), hasn’t chosen to be completely protected under the UK's Financial Services Compensation Scheme, and thus if, in the unlikely event that it were to go bust, getting the money back could be more difficult. See the Are Your Savings Safe? guide for a full explanation, and Martin’s Icesave safety blog.
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Six month Deals… 6.95% AER
The Birmingham Midshires Direct Internet Six Months Bond pays a high 6.95%, and Cahoot's Fixed Rate Bond pays 6.87% AER and both can be opened with just a pound. If you may need the money quite quickly this is a good half way house.
Other deals / time periods.
For other lengths and a full list of fixed rate savings accounts use the MoneySupermarket* and Moneyfacts comparisons.
Guaranteed Rates
If you want surety that even if you don't check your saving rate, you're safely getting at least a reasonable deal, one route is to pick a high paying account that guarantees to match or beat either the Bank of England base rate, or the Retail Price Index – the UK's measure of inflation.
- Base Rate Guarantee
Kaupthing Edge's* top pick online account pays 6.5% AER currently and is guaranteeing to beat the base rate by at least 0.3% until 1 February 2012, making it the top guaranteed account also.
- Inflation Beating Guarantee:
The rate at which prices increase is called inflation. NS&I, the government backed savings organisation, has a 5 year Index Linked Savings offering to pay 0.35% more than inflation. It uses the higher measure, Retail Prices Index (RPI) inflation, at 4.2%, meaning it pays 4.55% overall. There is also a 3 year certificate offering a slightly lower rate.
The big bonus is that these savings are totally tax-free, meaning it could be a winner for higher-rate taxpayers. Anyone on basic rate tax would have to be earning 5.69% in a normal savings account to match this, while higher rate taxpayers would need a huge 7.58% to beat it.
However, the cash must be left there for at least five years (three if you use the lower payer), and at least £100 must be deposited, so it's not for those who want a short term place to save. And if inflation drops, its relative performance could drop too. Yet as it's guaranteed to be higher than inflation and tax free, at least you know your money will always grow quicker than prices will rise.
The Savings Calculator
Below is a special calculator designed to tell you all you need to know about your savings. Simply enter all the details, remembering to choose the level of tax you pay. For the most accurate answer use the AER (Annual Equivalent Rate) which should be listed on your statement. Obviously as most account’s interest rates are variable, the calculations will change if the rate does, but it should give you a good idea.
The calculator assumes you put money in at the beginning of each month, so if this isn't how you do it, the answers will be ever-so-slightly out. If you don’t make regular deposit but put lump sums, figure out the monthly equivalent for a rough answer. Feel free to play with the results to see how it impacts your savings
