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



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 Moneynet.co.uk: "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.

Compensation

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.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
REX/Eye Candy
science
News
A photo of Charles Belk being detained by police on Friday 22 August
news
News
i100
Sport
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
Extras
indybest
Life and Style
Google Doodle celebrates the 200th birthday of Irish writer Sheridan Le Fanu
tech
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
News
i100
News
In Eternal Sunshine of the Spotless Mind Jim Carrey and Kate Winslett medically erase each other from their memories
scienceTechnique successfully used to ‘reverse’ bad memories in rodents could be used on trauma victims
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
tv
Finacial products from our partners
Property search

A student's guide to financial survival: You don't have to drown in debt at university

Fresh from A-level delight, the moment does not have to be soured by students resigning themselves to thousands of pounds worth of debt in three years' time. Rob Griffin sees how to pass the university challenge

'Dismal' eurozone data sparks concerns

European Central Bank chief Mario Draghi is under pressure to launch promised stimulus before the EU slides further
Love but not marriage: property is one area where cohabiting couples are in danger of losing out

How couples can protect their financial interests when cohabiting

People who simply live together cannot assume they have the same rights to each other's assets as spouses or civil partners. Michelle McGagh sees how they can protect their financial interests

India could be jewel in the crown for investors

With a new government and an ambitious prime minister, the country offers the prospect of strong returns. But there may be hiccups ahead, warns Simon Read

Child Maintenance Service to replace Child Support Agency - but is it better?

Reforms to the vexed question of child support payments by absent parents mean extra charges for both sides. Neasa Macerlean reports

Barclays's new life insurance heralds a revolution on the high street

The new product marks a shift towards 'clear, straightforward and standardised' banking products, says Simon Read

How to protect your assets if the stock markets begin to head south again

Are you worried about your portfolio? Nick Paler asks fund managers and investment insiders for advice
Fuel poverty campaigners united in criticising the delays in helping those in fuel poverty

Plans to tackle fuel poverty are slammed by campaigners

Charities and action groups believe that the Government's proposals are woefully inadequate
Sell it with flowers: competition is 'intense' for homes with outside spaces

Gardens add a tenth to the value of your home

A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

    £40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

    C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

    £45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

    DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

    Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

    Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

    £50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

    Day In a Page

    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone
    Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

    What is the appeal of Twitch?

    Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
    Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

    How bosses are making us work harder

    As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
    Manufacturers are struggling to keep up with the resurgence in vinyl records

    Hard pressed: Resurgence in vinyl records

    As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
    Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

    A tale of two writers

    Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
    Could a later start to the school day be the most useful educational reform of all?

    Should pupils get a lie in?

    Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
    Prepare for Jewish jokes – as Jewish comedians get their own festival

    Prepare for Jewish jokes...

    ... as Jewish comedians get their own festival
    SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

    A dream come true for SJ Watson

    Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
    10 best cycling bags for commuters

    10 best cycling bags for commuters

    Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
    Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

    Paul Scholes column

    Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
    Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

    Kate Bush shows a voice untroubled by time

    A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
    Robot sheepdog technology could be used to save people from burning buildings

    The science of herding is cracked

    Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
    Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

    This tyrant doesn’t rule

    It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?