While everyone wants to get the best interest rate on their savings, it’s important to choose an account that’s right for all your needs. Here, we set out the key questions to ask yourself when weighing up your options.
1. Will you need to access your money?
Generally speaking, the longer you’re able to tie up your savings, the higher the interest rate you can expect to earn. For those who know they won’t need to use their savings any time soon, fixed term accounts are ideal and savers can typically choose between a one, two, three or five year term to lock in their funds. At the other end of the scale, if you want to be able to dip in and out of your savings on a regular basis, then a straightforward easy access account may be better for you. Notice accounts offer a half-way house between easy access and fixed term, often offering a rate somewhere in the middle provided savers can give 30, 90 or 120 days advance warning before withdrawing their money.
2. What’s happening in the wider interest rate environment?
When savings providers set the interest rates on their products, they look at benchmark rates in the wider economy, such as the Bank of England base rate. However, they also look closely at how much money they already have and how much money they will need to fund future lending. If lending is going up, then they’ll need to attract new money. If not, then increasing rates and bringing in more money might not make sense. So, while it’s perfectly sensible for savers to keep an eye on the wider interest rate environment, it’s also important not to get paralysed by it. We all hope better returns are round the corner, but don’t lose out now by doing nothing in the meantime.
3. Have you taken full advantage of your tax-free, ISA savings allowance?
Normally, any interest that you earn on your savings has tax taken off at 20% before you receive it. Depending on your individual tax situation, you may be able to claim this back or you may have to pay more. However, provided you save within an ISA (Individual Savings Account), then any interest you earn will be tax-free. In the current tax year, running from 6 April 2014 to 5 April 2015, the annual ISA allowance has increased to £15,000, which, if you’re over 18, you can split however you want between a cash ISA and stocks & shares ISAs.
4. Do you want to use the interest from your savings to supplement your monthly income?
This is an important consideration, especially for retired savers, many of whom rely on the interest from their hard-earned savings to supplement their pension. Many savings accounts - including our new notice and fixed rate accounts at Paragon Bank - offer the option of receiving interest either monthly or annually. NS&I have recently indicated that monthly interest won’t be available on the new Pensioner Bonds to be issued in January 2015. If monthly interest matters to you, make sure it’s on offer from your savings provider.
5. Are your savings protected by the FSCS?
The FSCS (Financial Services Compensation Scheme) is a statutory compensation scheme that protects savings deposited with banks and building societies up to a limit of £85,000.
If you have less than £85,000 in cash savings with an authorised firm - those regulated by the Financial Conduct Authority or the Prudential Regulation Authority - you can be confident that all of your savings will be returned to you if that institution fails.
If you have more than £85,000 in cash, you should consider spreading your money across a number of savings providers as the FSCS will only pay out £85,000 per person, per authorised institution. You should also be aware that some firms may be part of the same overall group, which may mean that only the first £85,000 held group-wide is covered.