You might be one of those people who are feeling pretty smug right now, having been organised enough to make a monthly deposit into a savings account.
But what if I told you that by the end of the year, you would have earned a measly 10p in interest, would that wipe the smile off your face? I bet.
According to a report on BBC1’s Watchdog last week, some of the major banks are offering the worst savings interest rate in the last five years. And with Her Majesty’s Revenue & Customs swiping 20% tax off what you have saved, you really need to sit up and look at what rate you are being paid and think about switching your savings.
So how has this come about, where you thought you were sitting on a great rate and suddenly you are earning peanuts? The problem is that many of the big named banks are offering an introductory to draw you in. For example, you might see an account with an interest rate of 3%.
However, after a year this introductory rate can drop to a lower rate and the banks are hoping that either you do not notice or you cannot be bothered to swap your savings to another account. And if you think this is not common practise, think again because 9 out of the top 10 banks are offering a special introductory rate.
Watchdog looked at three of the UK’s worst savings accounts and found that Lloyds were offering a range of spectacularly poor interest rates on their savings accounts, with the EasySaver coming in at 1.6% and Advantage at 1.8%, whilst NatWest and HSBC were offering a very low 0.75% on two of their savings accounts, the Instant Saver and the Online Bonus Saver respectively.
To give you an example of what interest would be paid out on an account that pays 0.1% interest, if you deposited £500 at the beginning of the year, the interest accrued would amount to 50p. Hardly worth it?!
So what should you be looking for and what is a good savings account rate? Well, anything around 2.9% – 3% these days is good.
Surprisingly, none of the big banks are offering 3% at the moment, or even 2.9% but Coventry Building Society is giving its Family Saver account 3% for the first year. Principality Building Society are offering 2.8% on their e-Saver account whilst AIB are offering 2.8% on their Easy Access Reward account.
If you are not happy with these rates and you are fine with not accessing your money for 60 days or more, you should always consider a Cash ISA. A Cash ISA is just like an ordinary savings account, but comes with one important exception – you do not pay any tax on the interest. There is more information about the current ISA allowance on this page http://www.moneysupermarket.com/savings/isa-allowance/, thanks to our friends at MoneySupermarket.com.
You can save up to £5,640 in a cash ISA in the current tax year and there are a range of different accounts, including easy access ISAs and fixed-rate ISAs. If you are a taxpayer you should almost always put money in an ISA, instead of a standard savings accounts.
If you do want to start a savings account, here are our tips:
- Be mindful of the restrictions that apply to your account. Some accounts restrict the amount you can save, or the amount or frequency of any withdrawals. You have to make sure you don’t breach the limits otherwise you could lose interest.
- Banks that offer internet accounts will generally have higher interest rates over branch based deals, so if you manage your account online this is your better option.
- As for when you have your interest paid into your account, unless you frequently dip into your savings it is probably best to have the interest paid annually.
- Keep a note of when your introductory rate ends and aim to switch to a better one before you go onto the poorer rate.