Earn a rate of 4.65% on your savings
If you're prepared to lock your money away for a few years, you could boost the return on your savings to 4.65%. Or higher.
A new market-leading fixed rate bond has been launched, so it’s a good time to review the best savings bonds on the market.
The new bond is the FirstSave One-Year Fixed Rate Bond (18th Issue.) It pays 3.6% a year in interest, which is a market-leading rate matched only by one-year bonds from the AA and Shawbrook Bank. The minimum deposit is £1,000.
Given that you’ll only have to lock away your money for a year, that’s a pretty decent rate in the current environment. After all, you can get little more than 3% if you sign up for a conventional easy access account.
However, you can get better rates if you can lock your money away for longer. So let’s look at the best rates for two-year bonds and longer:
Top fixed rate savings bonds
|
Account |
Term |
Interest Rate (AER) |
Minimum deposit |
Access |
|
Two years |
4.0% |
£1,000 |
Online |
|
|
Three years |
4.15% |
£1,000 |
Online |
|
|
Four years |
4.2% |
£1,000 |
Online |
|
|
Five years |
4.65% |
£1,000 |
Online |
In many ways, the Vanquis five-year account is the most attractive as it pays out 4.65%. Compared to the rest of the market, this is a very sexy account.
However, five years is a long time and you can’t be sure what will happen to inflation and the base rate over the next five years. Inflation might have risen to 7% by 2015 and the base rate might have jumped to 5%. If that were the case, you’d expect the top instant access accounts to be paying something like 7% and you’d be pretty fed up that your savings were only earning 4.65%.
On the other hand, if inflation has fallen to 2% by 2015 and the base rate is still 0.5%, 4.65% would pack a powerful punch and you’d be delighted by your good fortune!
Alternatively, you could save into a fixed rate cash ISA. The big advantage of a cash ISA is that you won’t pay any tax on the interest you receive, but remember that your cash ISA allowance is only £5,340 for the year.
The best five-year fixed rate ISA comes from Kent Reliance Building Society and pays 4.35% a year in interest. If you’re a basic rate taxpayer, that’s equivalent to 5.43% in a conventional savings account. In other words, if you earned 5.43% in interest and then paid 20% in tax, you’d end up with 4.35%.
Looking at these figures, it’s clear that cash ISAs normally make more sense than conventional savings accounts. We’d say that you should only consider normal savings accounts if you want to save more than your £5,340 allowance or you want to use all of your ISA allowance for stock market investing.
One last option
There is one last option which we haven’t mentioned so far – social savings websites. These are sites that enable you to use your savings to lend to individuals or businesses via the web. As a result, you can cut out the traditional middleman – a bank or building society. The best known social lending sites are Zopa, FundingCircle and RateSetter.
With RateSetter you can earn as much as 7% a year on your savings if you’re prepared to lend over a three-year term. For more on how social lending sites work, check out Savers: Earn 11% on your money!
So once again, it’s clear that if you’re able to think long-term, you can get a better return.
More: The best ways to save for the short term | Could Facebook kill free banking?
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Comments
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Hello Pastsellby, Yes, you're right. I made a bad mistake there. I've amended the article and removed the error. Ed
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Hi Diana, Yes, you're right, most banks pay less interest on their Cash ISAs than their conventional savings accounts. That's annoying. Nevertheless, if you're a basic rate taxpayer, the tax boost you get from investing an ISA means that with many banks, you're better off going with an ISA. That's all the more true if you're a higher rate taxpayer. So let's just look at two top-paying accounts as examples. If you want a one-year fixed rate bond, the top conventional savings account will pay you 3.6% (firstsave and others). If you go for a one-year fixed rate cash ISA, the top accounts pay 3.25%. However, a basic rate taxpayer will pay 20% tax on the interest from the conventional savings account, so effectively will only receive 2.88% interest. But he'll get 3.25% from the Cash ISA. So the Cash ISA wins. In my experience, once you take tax into account, the Cash ISA normally delivers a better return although that isn't always the case. Regards, Ed
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I am also a Zopa lender and have been for just over 2 years. I've averaged 7.5% pa before tax, but market average rates are going down, and like Mike10603, I'm now lending to A* borrowers at just over 6%. Raise your rate too high, and nobody will want to borrow it. I've had 2 defaults during this period, both on (relativerly) high-risk loans and again like Mike, I only lend in £10 packets to spread the risk. I have considered leaving Zopa because the rates aren't what they were (what is?), and they were never anything like as good as these articles suggest - but I feel that I'm helping people when the banks won't and, yes, it's fun.
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13 February 2012