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,

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

people'It can last and it's terrifying'
people Emma Watson addresses celebrity nude photo leak
Arts and Entertainment
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
Life and Style
fashionModel of the moment shoots for first time with catwalk veteran
Alexis Sanchez, Radamel Falcao, Diego Costa and Mario Balotelli
footballRadamel Falcao and Diego Costa head record £835m influx
Arts and Entertainment
Olivia Colman topped the list of the 30 most influential females in broadcasting
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Arts and Entertainment
Danish director Lars von Trier
filmEnglish-language series with 'huge' international cast set for 2016
Life and Style
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
Finacial products from our partners
Property search
Latest stories from i100
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

    HR Generalist (standalone) - Tunbridge Wells - £32,000

    £30000 - £32000 per annum: Ashdown Group: HR Generalist (standalone) - Tunbrid...

    Derivatives Risk Commodities Business Analyst /Market Risk

    £600 - £800 per day: Harrington Starr: Derivatives Risk Commodities Business A...

    Power & Gas Business Analyst / Subject Matter Expert - Contract

    £600 - £800 per day: Harrington Starr: Power & Gas Business Analyst/Subject Ma...

    Infrastructure Lead, (Trading, VCE, Converged, Hyper V)

    £600 - £900 per day: Harrington Starr: Infrastructure Lead, (Trading infrastru...

    Day In a Page

    'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

    'I’ll tell you what I would not serve - lamb and potatoes'

    US ambassador hits out at stodgy British food
    Radio Times female powerlist: A 'revolution' in TV gender roles

    A 'revolution' in TV gender roles

    Inside the Radio Times female powerlist
    Endgame: James Frey's literary treasure hunt

    James Frey's literary treasure hunt

    Riddling trilogy could net you $3m
    Fitbit: Because the tingle feels so good

    Fitbit: Because the tingle feels so good

    What David Sedaris learnt about the world from his fitness tracker
    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Second-holiest site in Islam attracts millions of pilgrims each year
    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering