10 ways to beat rubbish savings rates

If today's dismal rates have led you to conclude there's no point in saving, here are ten alternatives.

Easy access savings accounts continue to disappoint savers. That’s not surprising given that the base rate has been stuck at a historic low of 0.5% for the last 18 months. The Bank of England Governor Mervyn King recently indicated interest rates are likely to stay low until the end of 2011, suggesting returns on cash will remain poor for some time to come.

I still think it’s sensible to keep an emergency cash cushion in the most competitive easy access account you can find. But, beyond that, if you’ve finally decided enough’s enough, here are ten alternatives ordered from low to high in terms of the expected returns: 

1. Go for a tracker bond

If you’re already a Santander customer (with a Santander mortgage, investment or current account, or you’re in the process of switching) you’ll qualify for the excellent One Year Loyalty Tracker Bond as long as you put away at least £10,000. With this account, you’ll earn a fixed rate which beats the base rate by 2.75%, giving a return of 3.25% today. Your money will be locked away until maturity on 1 October 2011. 

2. Choose a high interest bond

You can earn better rates by opening a long-term fixed rate bond. If you’re happy to lock your cash up for five years, you can earn 4.8% with the Baroda MAX 5 Year Fixed Rate Bond, or 4.75% with the ICICI HiSave Fixed Rate Account. Don’t forget, there’s a risk your rate may become uncompetitive if it can’t keep up with the new best buys which join the market. If that concerns you, fix your rate for a year and earn 3% with the FirstSave 1 Year Fixed Rate Bond or the Wesleyan Fixed Rate Deposit.

3. Switch to a high interest current account

You probably already know a high interest current account is a great way to earn a top return. Sadly there aren’t many available, but the Santander Preferred In Credit Rate account is still offering 5% fixed for a year on balances up to £2,500. (Balances over £2,500 earn just 0.1%). What’s more, you’ll get £100 cashback when you switch. To qualify, you’ll need to pay in at least £1,000 a month and transfer over your direct debits.

Just be aware that many Santander customers have had problems with access to their bank accounts recently, due to the migration of accounts from Alliance & Leicester, although apparently the issues are now being addressed.

If you don't like Santander, go for the Lloyds Vantage current account instead. It offers 4% on balances between £5,000 and £7,000. Again, you need to pay in £1,000 a month to qualify for this account, but you don't need to transfer over your direct debits and you can set up standing orders to transfer this sum in and out every month. You can open three accounts at once, so you could potentially save up to £21,000 at 4% - with instant access!

Recent question on this topic

• fodigie asks:

  Can I pay into a Cash ISA several times a year as long as I don't go over the annual limit?

  • 
    liesarenocomfort answered "Not if it's a fixed rate isa (you can't usually add to these). Yes if it's a bog standard one, but..."
  • 
    MikeGG1 answered "You can add cash as often as you like as long as the contract permits it. You can also add cash to..."
  • Read more answers

4. Save in an ISA

An easy to improve the rate on your savings is to put up to £5,100 in a tax-free cash ISA. The good news is the best buys are paying even better returns than taxable savings accounts. You can earn the equivalent of a whopping 5.15% by choosing the Halifax ISA Direct Reward which is currently topping the best buy tables, and combining it with the Halifax Reward current account. Find out how in Earn 5.15% on easy access savings.

5. Invest in gilts

A gilt is a loan to the government which pays investors a fixed rate of interest. Gilts are considered ‘safe’ since the chance of the government defaulting on its debts is very low. The last Barclays Gilt Equity Study shows that historically (since 1900) gilts have returned a real average annual return of 5.4%. They have produced spectacular returns over the last 20 years, but some argue this may be tempered as increased supply will likely lead to lower prices, with an expected raft of new gilts being issued in the coming years to fund the national debt.

6. Invest in corporate bonds

Corporate bonds shares similarities with gilts except that you’ll be lending to a company rather than the government. The risk of default is higher which means although bonds are more risky, they offer higher returns to compensate investors but, at the same time, they’re deemed lower risk than shares. The fantastic returns of 2009 are unlikely to be repeated, but analysts say yields of between 5% and 7% from corporate bonds are still attractive. Even better you can earn a tax-free income by holding corporate bonds in an investment fund held in an ISA, pension or SIPP (self-invested personal pension) wrapper.

7. Become a Zopa lender

Zopa is an online lending business which brings together people who want to borrow with people who have cash to lend and want to get a better return than a savings account. Your money will be divided between a number of borrowers to spread the risk of default, and you choose the rate you want to earn. Over the last year Zopa lenders enjoyed an average annual return of 8.2% (before bad debt).

8. Invest in Funding Circle

Funding Circle is similar to social lending platform Zopa except that instead of lending to other people, you’ll be lending to small businesses. You can lend between £20 and £2,000 per business, and again your money will be spread to manage default risk. Funding Circle is a new venture but claims annual returns of 6% to 9% are feasible. Find out more in Earn up to 9% on your savings.

9. Invest in an index-tracker

If you fancy taking more risk with your cash, consider investing in an index-tracker. An index-tracker replicates or ‘tracks’ the performance of a particular index by investing in all the shares quoted on it. A FTSE 100 index tracker will perform in more-or-less the same way as the FTSE 100 index, although it will lag behind a little once charges have been deducted. If you had invested in a FTSE 100 index tracker over the last year you would have earned around 13%.

10. Take a punt on the stock market

Finally, for those of you who are feeling even more speculative, why not take a punt on the stock market instead of putting up with dismal savings rates? But don’t forget if you start to buy and sell individual shares you may generate fabulous returns, but equally your gamble may not pay off and you could end up with nothing. You should only invest directly in shares with money you can afford to lose.

Compare savings accounts, ISAs, current accounts and index trackers at lovemoney.com

More: 25 top places to lock your money away | 3.25% savings that rise with the base rate