Are your savings going to sleep?

You don't have to resort to the mattress when interest rates are low. Melanie Bien reports on finding a better home for your cash

Falling interest rates are good news for borrowers but bad news for millions of savers. And with the Bank of England cutting rates six times this year – to a 40-year low – savers are running out of options.

To make matters worse, a number of banks don't bother informing customers that they have cut rates on savings accounts. But if you are relying on your savings for income, or simply want to maximise your returns, a rate cut is a big deal.

When it comes to saving, most of us want some emergency cash we can get our hands on quickly, as well as some money invested over the medium term – perhaps for a car, a holiday of a lifetime or school or university fees. And then we want money invested for the long term for our retirement.

Our rainy-day money should be kept in an instant access savings account paying the highest rate of interest we can find. Steer clear of the high street and opt for an internet savings account if you have access to the web. Intelligent Finance, for example, pays 5.01 per cent interest on balances of £1.

But you don't want too much money in a deposit account. "This shouldn't be a large capital sum; nobody should have £10,000 in an account no matter how risk-averse they are," says Donna Bradshaw, director at independent financial adviser (IFA) Fiona Price & Partners.

One alternative to the instant access savings account is a mini cash individual savings account. Most of these allow you to get your hands on your money without penalty when you need it. Returns are tax-free and you and your partner can each invest up to £3,000 each tax year. Smile pays 5.25 per cent on balances of £1, while Chelsea Building Society pays 5.65 per cent on balances of £10. This includes a 1 per cent bonus in the first year.

When times are hard there is often a flight to fixed-income investments such as bonds and gilts. These offer a guaranteed return on capital, a fixed income and a set maturity date. But the returns aren't as good as they have been because interest rates are low.

Investors who have a low-risk outlook should opt for a fixed-rate bond from a bank or building society. Julian Hodge Bank is paying 5.65 per cent on its five-year Capital Millennium Bond for those with a minimum investment of £1,000.

"Although rates [on fixed-income bonds] aren't as good as they have been, if interest rates are cut further, you know your income isn't going to be further affected," says Vivienne Starkey, partner at IFA Equal Partners. "It might be worth looking at fixed-income bonds over the short term, say a couple of years. Then you can move your money if the situation changes."

Another alternative is guaranteed income bonds. These are issued by life assurance companies rather than building societies and interest is paid net of basic-rate tax. They don't suit non-taxpayers because you can't claim the tax back. As with fixed-income bonds, they offer a fixed return over a set period.

Be wary of guaranteed equity bonds, which are linked to the stock market and might guarantee your income but not your capital. Look beyond the attractive headline rate and see what index it is tied to as some are riskier than others. A limited number of stocks will further increase the risk.

"You can get quite a good income from them but you have to think about your capital as well," says Ms Starkey. "They are not for everybody as they are very complicated. When markets are low it is time to look at these, but be extremely careful."

National Savings certificates also tend to be popular with savers but rates aren't very competitive at the moment and you can do better elsewhere. Corporate bonds are another option. These are issued by companies as a means of raising finance. They don't have the same degree of security as government bonds so they tend to pay more interest. The more risky a bond, the higher the rate of interest, so be careful if the rate looks too good to be true. High-yield, or "junk" bonds should be avoided unless you are happy to take on a high level of risk.

A corporate bond fund is a good way of reducing risk because you put money into a unit trust which invests in a wide spread of gilts and corporate bonds. Some funds are riskier than others; again, the higher the return, the more risk you are taking on.

"We are seeing quite a lot of interest in corporate bond funds," says Patrick Connolly, associate director at IFA Chartwell Investment Management. "But if the economy is struggling, the weakest companies will struggle, so look at the investment grade rather than higher-yield funds."

He recommends corporate bond funds from Norwich Union, Old Mutual and M&G.

Contacts: Chelsea BS, 0800 132351; Intelligent Finance, 0845 609 4343; Julian Hodge Bank, 0800 028 3746; M&G, 0800 390390; Norwich Union, 0800 056 2450; Old Mutual, 020 7332 7500; Smile,

world cup 2014A history of the third-place play-offs
Tommy Ramone performing at The Old Waldorf Nightclub in 1978 in San Francisco, California.
peopleDrummer Tommy was last surviving member of seminal band
Life and Style
Swimsuit, £245, by Agent Provocateur

Diving in at the deep end is no excuse for shirking the style stakes

The Mexico chief finally lets rip as his emotions get the better of him
world cup 2014
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
Life and Style
Several male celebrities have confessed to being on a diet, including, from left to right, Hugh Grant, Benedict Cumberbatch and Ryan Reynolds
...and the weight loss industry is rubbing its hands in glee
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
Yaya Touré has defended his posturing over his future at Manchester City
Detail of the dress made entirely of loom bands
Life and Style
There were mass celebrations across Argentina as the country's national team reached their first World Cup final for 24 years
transfersOne of the men to suffer cardiac arrest was 16 years old
Arts and Entertainment
Armando Iannucci, the creator of 'The Thick of It' says he has
tvArmando Iannucci to concentrate on US show Veep
A mugshot of Ian Watkins released by South Wales Police following his guilty pleas
peopleBandmates open up about abuse
Basketball superstar LeBron James gets into his stride for the Cleveland Cavaliers
sportNBA superstar announces decision to return to Cleveland Cavaliers
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

    A History of the First World War in 100 Moments

    Peace without magnanimity - the summit in a railway siding that ended the fighting
    Scottish independence: How the Commonwealth Games could swing the vote

    Scottish independence: How the Commonwealth Games could swing the vote

    In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
    Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

    A writer spends a night on the streets

    Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
    Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

    UK's railways are entering a new golden age

    New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
    Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

    Conchita becomes a 'bride' on Paris catwalk

    Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
    Pétanque World Championship in Marseilles hit by

    Pétanque 'world cup' hit by death threats

    This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
    Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

    Why did we stop eating whelks?

    Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
    10 best women's sunglasses

    In the shade: 10 best women's sunglasses

    From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
    Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

    World Cup final: Messi? Mascherano is key for Argentina...

    No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
    Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

    Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

    18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice