We can save savers from interest hell
If you are a saver, I want to show you how to urgently accelerate your interest. The big warning is for anyone with fixed-rate savings. Over half a million are due to end this month, and when that happens banks tend to shift your cash into holding accounts paying dismal rates as low as 0 per cent.
Many go into fixed rates for long-term stability, and if you did that a few years ago you could still have been earning well over six per cent. Yet savings providers aren't stupid. They try and get another bite at your cash when the deal ends, leaving you suffering rate shock.
It's a clever business model. They flog people a high fixed-rate account, knowing that when it ends they can pay them next to nothing for months. So if your fixed rate's ending or you are trying to work out what to do with your cash, here are six things every saver should know:
● Pay off debts before savings
The best use of savings is to pay off expensive debts. Think of it this way: £1,000 in the best paying savings account would earn you about £20 a year after tax, yet owe a high street credit card the same amount and you would pay £180 a year. Thus pay off the debts with the savings and you're £160 per £1,000 better off.
● Repay your mortgage?
This is worthwhile for many savers. If your mortgage rate is higher than the after-tax rate you can earn on savings then you will earn more repaying the mortgage than saving.
Check you are allowed to overpay your mortgage without penalties, and, remember, once the cash is in the mortgage you can't borrow it back (unless your mortgage is flexible).
For a step-by-step guide on this, see www.moneysavingexpert.com/repaymortgage
● Start with a cash ISA
A cash ISA is a tax-free savings account into which every adult can now put up to £5,100 each year. If you have not opened one since April 6, it is the first place to put your cash. The current top payer is Cheltenham & Gloucester's cash ISA currently paying 2.7 per cent easy access, though it does include a bonus of 1.7 per cent for the first year. For all best-buys, see www.moneysavingexpert.com/cashISAs
● Can you put money aside every month?
Much higher rates sometimes up to 5 per cent are available in special regular savings accounts. Yet you can only put between £10 and £500 every month. The problem is there's a limit on the cash you can save and they are only short term, usually lasting a year. Plus, after that, they dump your money in a poor-paying account, so you'll need move it.
● Part of a couple?
If you are, and one of you pays a lower rate of tax, put the savings in their name and you will earn more. There is no issue doing this between spouses, but if you are not married and you die within a few years, there could be an inheritance tax issue. Of course there is also the issue of "trust" too.
● Are your savings safe?
The final thing to remember is that if you put money in a fully UK-regulated bank account, you are protected up to £50,000 per person per financial institution.
However, some banks that are part of the same group, such as Halifax and Bank of Scotland, count as one institution so the £50,000 is combined, while others that are part of the same group, such as RBS and NatWest, count as separate institutions. Full details of how banks are linked at www.moneysavingexpert.com/safesavings
The only other exception is that some EU banks operating in the UK are allowed to rely on their home country's protection scheme. That means while Punjab National Bank's UK savings have full UK protection, put money in Post Office branded savings and it's actually run by the Bank of Ireland, its protection relies on the Irish government.
● The Top Savings Deals
Top Easy Access The AA offers 2.8 per cent AER easy access with only £1 needed to open it. Yet this amount includes an intro rate boost of 2.3 per cent bonus for a year, so diarise that time and ditch and switch then to keep the rate high.
I used to warn people to avoid bonuses but with rates so low at least a 2.3 per cent bonus guarantees the interest rate can't drop below that for a year. The top account without a bonus is currently the Halifax Web Saver Extra which pays 2.6 per cent, though the rate is variable and can be changed, also it only allows one penalty-free withdrawal a year. If you already have a Halifax current account, the rate is boosted to 2.8 per cent.
● Top fixed-rate accounts
If you want to lock your money away, you can earn more on the top fixed-rate paying accounts. The top fixed rate online is Bank of Baroda's Max account, if you have a minimum of £500, although to get this you must go via comparison site Moneysupermarket. The rates are 3.15 per cent AER for a one year fix, 3.8 per cent for two years and 4.3 per cent for three.
Alternatively, for shorter fixes you can earn slightly more via a postal account from the Punjab National Bank with 3.25 per cent AER for a year and 4 per cent for two years. Both are fully UK regulated, so you get the full £50,000 per person protection.