Escape The Big Savings Trap

Posted on: 20 January 2009 by Gareth Hargreaves

We show you ways for savers to beat the 0% savings rate trap.

Savings rates are at their lowest level in more than 100 years with some accounts actually paying no interest at all. But there are ways for savers to beat the 0% savings rate trap.

Axe Tax

Savers who are taxpayers should always utilise their annual £3,600 tax-free cash ISA allowance - this adds up to £7,200 of tax-free savings for a couple each tax year.

Though cash ISA rates are not always as attractive as those on some of the best ordinary savings accounts, they are tax-free and boost returns.

The best deal available is from Manchester Building Society at 4% on balances of £1,000 or more. This ISA can be operated via branches or by post.

Standard Life Bank has an ISA paying 3.85% on £1 or more, access is by phone, while Staffordshire-based Leek United Building Society has a branch-based ISA paying 3.75% on deposits of £1 or more.

Cash ISA savers can also have equity ISAs, but the combined annual tax-free allowance is £7,200 of which a maximum of £3,600 can be held in cash. Don't forget that children aged 16 and over can have a cash ISA.

Non-taxpayers, such as children, do not have to pay tax on any savings income up to their annual personal allowance of £6,035. Non-taxpayers should complete an R85 form, available from banks and building societies, to ensure interest is paid gross.

Take A Bonus

A growing number of savings accounts are paying short-term bonuses to inflate headline rates. More than 150 accounts offer an introductory bonus compared with 116 in October 2007, according to research by Investec Private Bank.

Darren Cook at independent data compiler Moneyfacts says, “Savers must be prepared to move their money immediately when their rate falls after the bonus period. In the current low-rate environment, complacency can cost savers dear.”

Dutch-owned ING Direct is paying 4% gross to new customers in its instant-access online savings account. This includes a 1.95% fixed bonus for 12 months.

Get A Fix

Savers who do not need access to their capital can do better by fixing. A one-year HiSave bond with Indian-owned ICICI Bank, available online or by phone, pays 4.65% gross. Minimum investment is £1,000.

Anglo Irish Bank, which was nationalised by the government in Dublin this month, is paying 4.6% for one year on balances of £500 or more - an account operated by post and phone. The AA is paying 4.55% for one year on its phone bond.

Depositors can lock in for longer than one year, but at lower rates. Anglo Irish is again among the best players paying 4.2% over two years and 4% over three, four and five years.

Nationwide Building Society has a four-year bond paying 3.5%.

ICICI, West Bromwich Building Society and Anglo Irish Bank do not offer monthly interest on their bonds. But both Nationwide and Progressive Building Society do.

Inflation Busters

Inflation-linked bonds, on offer from National Savings & Investments and Leeds Building Society, pay a rate equivalent to inflation plus a small margin. NS&I pays inflation plus 1% on its three- and five-year index-linked certificates. Though inflation is falling, returns are boosted by the fact interest is paid tax-free.

Leeds pays 2% on top of inflation on its one-year branch and postal-based Inflation Buster Bond.

Look For Guarantees

A handful of accounts offer rate guarantees, including ICICI Bank's HiSave and Anglo Irish Bank's easyaccess and seven-day notice account.

Others include Scarborough Balance Builder 1, which pays 4% gross and guarantees the rate will always be at least half a percentage point above the base rate.

Coventry Building Society's Sixty Plus PostSave 3, for customers over 60, pays 3.65% with a guarantee ensuring the rate will always be a quarter-point above the base rate.

Go Online

The best instant or easy-access account returns are usually paid on online. Yorkshire Building Society pays 3.75% gross on its Internet Saver.

Tesco pays 3.6% on its online savings while ICICI pays 3.55% gross on its online and phone HiSave account.

Are you surviving the savings trap?

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