Top three tips for… deposit savings
Posted on Oct 15, 2019
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In our new series of blogs, members of our team discuss their ‘top three tips’. Here Andy Kirk's reveals his top three tips for deposit savings:
Tip one: Check the rate
Interest rates remain at historically low levels and it is increasingly difficult to earn a rate of interest in excess of inflation, given that the Consumer Price Index – a main measure of inflation – is currently 1.70%.
In addition, it is quite common for accounts to offer an attractive introductory rate, only for this to be slashed after six to 12 months. As such, it is worth carrying out an annual review of your savings accounts to make sure you are still earning a competitive rate of interest. It is not necessary to constantly chase the ‘top rate’ – bearing in mind the comment about introductory rates and the low rates available – but you should aim for a consistently competitive rate.
Don’t forget that you can also hold savings in a Cash ISA wrapper, which means there is no tax to pay on the interest – although this benefit has been slightly diminished by the introduction of the Personal Savings Allowance (PSA). The PSA allows a Basic rate taxpayer to earn £1,000 of interest a year tax free (£500 p.a. for a Higher rate taxpayer). For most people the PSA means that they no longer pay tax on their savings interest, but this may not always be the case, especially when interest rates rise and therefore the Cash ISA should not be dismissed out of hand.
Tip two: Protect your savings
The likelihood of a bank or building society failing is fairly remote. However, in the event of a UK-authorised bank or building society failing, the Financial Services Compensation Scheme (FSCS) will automatically compensate you up to £85,000 per eligible person, per bank building society or credit union. This means that a couple with a joint account can hold £170,000 with the same institution, without having to worry about the security of the provider.
It is worth bearing in mind a couple of caveats to this:
- Not all UK savings accounts are UK-regulated. Some EU-owned banks opt for a ‘passport scheme’ where you are reliant on the protection from the ‘home’ government, for example, Agri Bank, Ikano Bank and Fidor Bank.
- The compensation is £85,000 per institution, not per account, for example, HSBC and First Direct accounts share one £85,000 compensation limit.
Tip three: You don’t just have to use a bank/building society
Although often overlooked, National Savings & Investments (NS&I) offer a number of savings products, such as Premium Bonds and Income Bonds. The rates available are generally not the most competitive but one big advantage is that NS&I is backed by HM Treasury. This means that 100% of all money invested is secure. This can be useful for people who have savings in excess of the £85,000 FSCS limit.
Premium Bonds deserve a special mention, as they do not work like a normal savings account. No interest is earned with Premium Bonds, instead, there is a monthly prize draw for tax free prizes. The annual prize fund interest rate is currently 1.40%, which means that for every £100 of bonds held, 1.40% is paid out. The odds of winning for each £1 bond is 24,500:1. However, the prizes range from £25 to £1 million, although there are vastly more of the lower prize levels available; for example, there are about 3.3 million prizes for £25 but only two prizes of £1 million per month.
It is almost impossible to compare the attractiveness of Premium Bonds with a normal savings account, as there is no rate of interest with Premium Bonds; the competitiveness, or otherwise, will ultimately be determined by how lucky you are and therefore how many wins you enjoy each year.