As we approach the third year of low interest rates, what can you do to maximise the return on your savings?
Two weeks ago, the Bank of England Monetary Policy Committee yet again held rates at 0.5pc – where it’s been stuck since March 2009. A sustained low interest rate environment does make it difficult for savers trying to get the most for their money – but you can make your money work harder.
For example, there’s no point chasing rates on some of your cash if you’ve got money sitting elsewhere earning little or nothing. In particular, savers with Yorkshire Guernsey need to move their money out of any accounts they have with this offshore subsidiary of Britain’s second largest building society now. Yorkshire Guernsey is being shut down and no interest has been paid on any money left in accounts since December 2009. Yorkshire says most savers have shifted their money away; if you haven’t, act now (there’s a form online) as you’re losing money.
Or maybe you’ve had a fixed rate bond mature in the last few months – onshore, more than half a million came to the end of their term in October alone. If so, you need to find a new home for that money. Normally, if you had a short-term bond – lasting, say, a year or less – then the bank you had the bond with will simply move you into its new fixed rate deal lasting the same length of time unless you ask it not to.
But if you have a longer fixed rate maturing, then it’s likely that the proceeds of your bond have been moved to an easy access account which is likely to be paying a reasonably low rate of interest. While that’s fine as a temporary parking place for your money, you should not leave the cash sitting there too long or you’ll miss out on interest.
In the same vein, it’s worth checking whether you have any money sitting in an account that’s no longer open to new savers. These obsolete accounts usually pay far lower rates of interest than those currently being marketed to new savers – because there’s no reason to offer a great deal if the bank isn’t trying to entice in new savers. For example, Alliance & Leicester International eSaver offshore issue 1 pays 0.35pc on balances between £1,000-£14,999 (it pays 1.5pc on £250,000 or more). You could move your money onto Alliance & Leicester’s three-year fixed rate of 3.75pc paid on £5,000 plus and you’d receive more than ten times extra interest. Most offshore bank websites will contain lists of interest rates on closed to new business accounts – check you don’t have money sitting in any of them.
If you’ve done all those checks, then the next option is to maximise what you can get on your money. Bluntly, to get the best deal at the moment on your savings you need to go for a fixed rate. Yes, there is a risk of variable interest rates moving against you, but how much of a risk really is there? Currently, money markets seem to be predicting that base rate won’t rise from its current 0.5pc until December 2015. While money market predictions aren’t that reliable, it does suggest that even taking a five-year fixed rate may not be a bad idea. It certainly means that going for a three-year or less fixed rate deal seems a good move.
Let’s assume you have £10,000 to save. If you put that in the best paying variable rate account at the moment – Nationwide International’s 95-day notice deal at 2.65pc - then after a year assuming the rate on the account doesn’t move you will have £10,265. If instead you went for the top one-year fixed rate – 3.5pc from AIB International – then after a year you’ll have £10,350 v £85 more.
But the real difference comes on the longer term deals. Let’s assume you put your £10,000 in to the 2.65pc variable rate account and you leave it untouched for five years – and over that period the rate doesn’t move. After five years, you’d have £11,397. If instead you put your £10,000 into the Clydesdale’s five-year fixed rate of 4.3pc then after five years you’d have £12,343: £946 more. Variable rates would have to move up dramatically for you to be much worse off being stuck in a fixed rate – but if five years is simply too long a timespan for you, the one- and two-year rates on offer at the moment look pretty tempting.
Charlotte Beugge used tables compiled by Moneyfacts.co.uk in the writing of this article
Moneyfacts.co.uk – the comparison site you can’t afford to ignore
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