How to make your nest egg work harder

Prevent your savings languishing in a low interest account and switch to a better deal, says Annie Shaw
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The Independent Online

Savers have never had it so bad. Interest rates are at record lows while inflation is rising, leaving those who depend on savings to supplement their income, such as pensioners, particularly worse off. Last week, the Office for National Statistics identified another rise in the retail prices index (RPI) to 4.8 per cent, which only adds to the gloom. Yet it tends to be forgotten that the banking crisis actually helped some people to become savers. Mortgage interest rates have plummeted, leaving many households with cash to spare each month.

Research by Sainsbury's found that by the end of 2010, mortgage interest costs were on average 28 per cent lower than in October 2008. While this situation surely won't last if the Bank of England raises rates to try to quell inflation, many mortgage borrowers have been using their spare cash to pay down other debts, while others have been able to put cash aside. Then there are the forced savers such as would-be first-time buyers, who have no option but to save for a deposit on a home now that 100 per cent mortgages have all but vanished from the market.

Research just published by HSBC suggests that, despite the comparatively poor returns available in the savings market, most of those it surveyed intended to save at least as much in 2011 as they did last year. The biggest groups of would-be savers were 18- to 24-year-olds, closely followed by 25- to 34-year-olds, more than half of whom are pledging to save more, despite the pressures of restricted employment opportunities, the cost of education and overhanging debt.

Richard Brown, head of savings at HSBC, says: "It's encouraging to see that intentions to save for the coming year are positive, with many planning to set aside more money in their savings pots. With a tough outlook for the year ahead, and based on their performance last year, however, it will remain to be seen whether these noble intentions materialise."

The hard part is deciding where the best place is to keep your cash. There are basically two choices and which one you opt for depends on your objectives, how you feel about putting your money at risk for potentially better returns, and how long the money can be tied up. Patrick Connolly, a spokesman for the financial adviser AWD Chase de Vere, says: "Either investors must accept less income or they must take more risk."

If you need an account that guarantees the security of your capital, or you are saving for the short term, for an occasion such as a wedding, a holiday or new furniture, or you need easy access to your money in case of emergencies, you will be restricted to some sort of cash deposit account.

If you are prepared to risk at least some of your investment in exchange for the chance of higher rewards and you can tie up your money for a longer period, then you are more likely to opt for stock market investment via funds or individual shares, investments in commodities, currency, property or some sort of proprietary investment product that embraces some or all of these.

In any case, you should spread your savings around in different types of assets according to your risk profile, and never put all your eggs in one basket.

Anyone without a generous company pension scheme will no doubt also be considering long-term savings for their retirement, which has been propelled to the top of the news agenda as the Government announces its reforms of the state retirement pension. While retirement planning can involve many investment and saving options, including buying property to rent out, investing in gold, or more optimistic strategies, such as winning the lottery, most people saving for their retirement over the long term will be putting something aside each month into a stock market-based scheme that involves at least some element of risk.

Inflation is the great unknown for anyone trying to devise a savings strategy, says Andrew Hagger, spokesman for the comparison website "The double whammy of ultra-low interest rates and stubbornly high inflation is making it virtually impossible for savers to get a real return on their cash without locking it away for three years or more.

"With the consumer prices index (CPI) now at 3.7 per cent, and RPI even higher, a basic-rate tax payer needs to earn 4.625 per cent gross on their savings to maintain their spending power, while a high rate tax payer needs a gross savings rate of 6.17 per cent."

This simply can't be done with a savings product, meaning that the spending power of saver's cash is diminishing each day in real terms.

Research by the consumer magazine Which? Money found that nearly nine out of 10 savings accounts that were available six years ago are now paying interest of 0.5 per cent or less, while almost two-thirds are paying 0.1 per cent or less – just £1 a year for every £1,000 saved.

At the same time, more than a third of savers have left their money languishing in a savings account that they opened six years ago or more, despite the pitiful rates of interest. An astonishing 40 per cent said that they had no plans to switch accounts in the future, because they believed that all savings interest rates are "pretty much the same".

However, Which? says this is simply not the case, and that switching accounts can be rewarding. It found that, if every saver who put their money in an instant access or ISA account paying a typical 0.5 per cent invested their money in an equivalent best-buy account instead, they could collectively gain £12 billion a year, equivalent to £322 each.

The key to getting the best rate is to keep an eye on what you are currently getting and to be nimble on your feet, ready to switch if a better deal becomes available.

Investors similarly need to adopt the same principle and stay vigilant to ensure that their investment objectives are still on target. Research by JP Morgan Asset Management found that more than one in 10 investors review their core investment holdings only once a year, while one third who opted for a risk-based investment get cold feet and actually hold their portfolio in cash. David Barron, head of investment trusts at the company, says: "It is wise to hold a cash cushion for emergencies, but investors who regard cash as a core asset should be aware that other asset classes can make their money work harder for them. Diversification should be a key part of a private investor's portfolio of core holdings and, as such, this means regularly reviewing what they're investing in."

What does the future hold?

Hagger says: "The sixty-four million dollar question is: when will rates start to increase? Expert opinion seems to be divided. I think we may see a couple of small rate rises before the end of 2011."

He warns that even if rates go up we shouldn't expect savings rates to increase by the same amount. "Don't expect banks to pass on any rate increases in full, as this will be the first time in over two years that they will have an opportunity to claw back some of their profit margin," he says.

He also warns savers not to fix rates for too long, or they could find themselves trapped in uncompetitive products.

How to find the best deal

Check out the rate

It’s easy to lose track of interest rates. Make sure you know what you’re getting, particularly on old accounts. If it’s fixed or has a bonus, make a note of the date it ends and be ready to switch to a better rate right away.

Shop around

When your fixed rate ends, your provider may write to you offering you a range of other accounts. Don’t feel you have to pick one of them. Check out the competition too.

Use your tax breaks

Make sure you use your annual individual savings account (ISA) allowance. You can put up to £10,200 per tax-year into an ISA, of which £5,100 can be held in cash (or £10,680 and £5,340 respectively from 6 April 2011).

Regular savings

If you can put money aside each month, choose a regular saver account, as they tend to pay more interest. Among the current best buys are First Direct, which pays 8 per cent fixed for 12 months for between £25 and £300 per month, while Norwich and Peterborough Building Society pays 4 per cent fixed for 12 months for £1 to £250 per month, and Saffron Building Society is offering 4 per cent gross fixed for 12 months for £10 to £200 a month.

Children’s savings

If you’re saving for a child, take advantage of higher rates often available on accounts for young people. Bath Building Society’s Futurebuilder account pays 5 per cent on the first £500, and Santander’s Youth Plus account pays the same rate. Halifax has a regular saver account for children paying 6 per cent fixed for a year. If the child is not a taxpayer – and most usually aren’t – complete form R85 to have interest paid without tax taken off.

Instant access

If you might need to get at your money at short notice, best buy accounts include 2.9 per cent from the Post Office, which includes a 1.25 per cent bonus, and 2.75 per cent from Santander, which includes a 2.25 per cent bonus. Both bonuses apply over 12 months.


The limit to savings |protection covered by the Financial Services Compensation Scheme has risen since the beginning of this year to £85,000 for each depositor in |each separately authorised financial institution.

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