Even if savings interest rates are not very exciting right now, there are times when you need money in the bank. Whether you are saving for a house deposit or preparing to pay your child’s university fees, cash is always useful to have. Rainy day funds can also get you through tough times. So what are your no-risk options?
Many current accounts, if they pay interest at all, give you a measly 0.01% a year on your hard-earned money. With inflation currently at 2.3%, that means that your interest will struggle to match rises in the cost of living.
Savings accounts generally offer better interest rates but these are higher if you go for opt for a notice or fixed-rate account, which require you to tuck your money away for longer. According to MoneySavingExpert, the best easy access account currently pays 0.65% but a five-year fixed rate account will pay up to 1.7%. Regular savings accounts can offer rates up to 3% but only to existing current account holders only – there are also monthly maximums of around £50, so the annual interest is still likely to be modest.
Things to Consider:
- What's the interest rate and will it change?
- Are there any penalties for withdrawing money early?
- Keep an eye on your allowances if you want to keep your interest tax-free
- Is the provider covered by the Financial Services Compensation Scheme?
Protections
Earlier in the year we looked at the pros and cons of Cash Isas. Your Isa allowance could be put entirely in cash, and that’s worth £20,000. Junior Isas often have higher interest rates than the adult equivalent, which in theory is an incentive for parents to invest for their children's future. The Junior Isa allowance is currently £9,000 a year. Aside from these generous Isa allowances, basic rate taxpayers can get an additional £1,000 a year in interest without paying tax as part of the personal savings allowance.
Most providers are signed up to the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 of your savings (per individual not per household). In practice, this means that if the company holding your money goes bust, the UK Government steps in to refund you. It’s worth checking whether the provider has signed up to the FSCS, especially if their interest rate looks too good to be true. Be especially wary of anything marketed as a “mini bond” – these were banned for sale to retail investors by the regulator last year.
A note on risk: all savings products should keep your capital 100% safe. That’s reassuring for many people, especially if you have fixed obligations to meet or are naturally cautious. Interest rates will vary, however, and banks and building societies change them all the time (especially luring new customers in with higher “teaser” rates).
Some Other Options
Premium Bonds offer the chance of winning cash prizes every month from £25 up to £1 million and each individual can hold up to £50,000 in these government-backed accounts. They are a lottery so you may win nothing for many years, but unlike with the National Lottery where you lose your stake if you don't win, your savings stay put.
While the winning bonds are randomly selected, in theory you should win prizes equivalent to 1% a year (some people are luckier than others, of course). The odds of winning a bigger prize increase the more bonds you hold. At the end of 2020, the odds of winning a prize with a £1 bond was reduced from 24,500 to 1 to 34,500 to 1.
Premium Bond provider NS&I also offers Isas, and Income Bonds (currently paying 0.01%). NS&I is owner by the UK Government so all deposits are fully protected.
You can also park your money in cash temporarily with an investment platform, perhaps if you are waiting for the stock market to fall, or you are keeping a buffer to pay platform fees. These deposits are also protected by the FSCS, although you don't usually receive any interest on cash balances held.
