A savings account is not the best place to save
Rates from deposit accounts are pitiful, so try something different to achieve a better return
Britons, it seems, are either too hard-pressed to save, or have finally lost their patience with pitiful interest rates. With the best-buy Isa rates barely topping 2 per cent – comfortably below rises in the cost of living – it comes as no surprise that the Bank of England has said that we are raiding our savings at the biggest rate since the 1970s.
The bank said savers have moved a total of £23bn – equivalent to £900 per household – out of fixed-rate savings accounts in the past 12 months.
Some people are using up their savings to survive, of course, but others are genuinely tired of low returns and looking at the alternatives that are out there.
So should you be taking this cue to move the money that's languishing in a savings account and invest it elsewhere? And if so, what are the likely alternatives? Here are five options for your cash.
It is still the case that most current accounts offer little or no interest to customers in credit. But among those that do, the rates are far better than standard savings accounts.
Nationwide FlexDirect customers earn a healthy 5 per cent on balances up to £2,500, yet the building society has not extended the same generosity to its fixed-term savings clients: Nationwide's one-year Isa pays a meagre 1.50 per cent. Similarly, while Lloyds Vantage current accounts pay up to 3 per cent on credit balances between £3,000 and £5,000, again it pays only 1.25 per cent on balances of at least £2,000 on its one-year fix.
Santander's 123 account does carry a monthly fee of £2, but it offers 3 per cent on current account balances between £3,000 and £20,000, as well as cashback of up to 3 per cent on various bills, while the bank's two-year bond pays only 1.80 per cent on deposits of £500.
Anyone planning to use a current account to squirrel away savings will have to be highly disciplined, however, as it is all too easy to spend and take cash out using your debit card, without realising you have blown your budget.
An offset mortgage is another way to make your money work harder as it enables you to balance your savings against the total debt of your mortgage and therefore reduce the monthly interest payable on your mortgage.
So, if you have a £150,000 loan and £50,000 in linked savings, the bank will calculate the interest only on the difference (£100,000). If you continue to pay interest on the full £150,000, you will be overpaying and could clear your mortgage quicker, potentially saving thousands of pounds.
The sticking point is that you generally pay more for an offset mortgage. For example, Chelsea building society offers a fixed-rate offset at 1.85 per cent with a fee of £1,499, while West Brom offers a conventional fix at 1.48 per cent, albeit with a larger £2,499 fee, both fixed to 2015 and available up to 60 per cent loan-to-value.
Even if you have substantial savings and your mortgage rate is higher than your savings rate, you should still be better off. Charlottte Nelson of Moneyfacts says: "Offset mortgages are best suited to those who have a large amount of cash savings, and as an offset mortgage doesn't pay any interest, higher-rate taxpayers will also benefit the most from offsetting."
Individual shares can be highly volatile but UK equity income funds, which tend to invest in large, profitable companies, pay shareholders monthly dividends from their profits.
Danny Cox of Hargreaves Lansdown says: "For those happy to take some risk and a longer-term view, equity income investing has long been popular with investors. Artemis Income has a long history of outperforming and yields about 3.7 per cent with no tax to pay in a stocks and shares ISA."
Capital growth is important too, so independent financial advisers usually recommended holding some fixed-interest investments to diversify your portfolio.
Mr Cox says: "Strategic bond managers have the freedom to invest across the fixed-interest spectrum, from traditional government and corporate bonds to higher-risk high-yield bonds. The additional freedom relies heavily on the skill of the fund manager in making the right calls and so it can be higher risk. M&G Optimal Income is a favourite here with a current yield of 3 per cent."
Unlike cash deposits, money invested in stocks and shares is not protected. If markets crash or your fund manager makes a mistake, you could lose your savings, so keep a balanced portfolio and spread the risk as much as you can by investing in cash, equities, fixed interest and property.
If you are not happy to take on the volatility of stocks and shares, bricks and mortar could be a decent alternative to poor returns on savings.
Mark Harris of mortgage broker SPF Private Clients says: "Buy-to-let can generate a healthy income as well as capital appreciation over time, with only a relatively modest investment required because you can use a mortgage to gear up".
You will need to do your research to find an area where it will be easy to let a property, and if you don't want to spend your own time managing tenants, repairs and maintenance, be prepared to hand over 15 per cent to a managing agent.
Be warned that unlike cash, property is an illiquid investment, so you need to invest for the long term – at least five years – and budget for void periods when you have no tenants and have to cover the mortgage yourself.
"Rates on buy-to-let mortgage deals have fallen, with a wide range of deals available. Rates are higher than on residential deals and you will have to put down a 25 per cent deposit to access the best rates," says Mr Harris.
Peer-to-peer (P2P) lending is still small compared with the banks, but it is growing in popularity and offers an attractive blend of old-fashioned banking with modern benefits.
Companies such as Zopa and RateSetter provide an online platform for you to become the bank and lend your money to borrowers. The interest levels depend on how much risk you are willing to take and how long you lend for.
Zopa has been around the longest (since 2005) and advertises projected returns of 4.4 per cent after fees, for money invested over five years. You can lend as little as £10 but Zopa recommends at least £2,000, which will be lent out in small chunks to at least 200 borrowers to minimise risk.
Both Zopa and RateSetter hold separate safety funds to safeguard against bad debt, but ultimately, deposits are not covered by the Financial Services Compensation Scheme. Any borrower could default and, at worst, the platform itself could go bust, so in theory you could lose all of your money.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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