Two Smart Ways To Get A Better Savings Rate

There are still two places that savers can stash their cash and get a market-leading return.

It's been a calamitous year for savers. Already hit hard by rising inflation and the collapse of market-leading savings providers like Icesave and Bradford & Bingley, the recent dramatic cuts in interest rates have left many smarting with pain.

If you were lucky enough to get a fixed rate bond when rates topped 7%, then well done because I've just scoured the high street and the internet, and the best I can find is this 12-month bond from Anglo Irish Bank. It pays just 5%. And that's if you're prepared to lock your money away for a year.

If you want instant access, the situation is equally dire - Tesco's Internet Saver, at 6%, is the best I could find, but this rate is variable, which means it may be cut following the recent 1% base rate cut (or any further cuts which take place). It also includes a 1.5% bonus.

Remember, inflation is still relatively high, at 4.5% (according to the Consumer Price Index). And while admittedly, prices are falling, don't forget you also need to account for tax. This means that, in order to see a real return on your money, basic rate taxpayers need to find a savings account paying at least 5.63%, while higher-rate taxpayers need to find an account paying at least 7.5%!

Of course, the easiest way to get around this problem is to stash your cash in a Cash ISA, so it can grow tax-free. Abbey is leading the market here, offering a super rate of 5.75% on its conveniently named Super ISA. Now that might not sound like much but, as this return is tax-free, it's the equivalent of getting a 7.19% annual return on the high street for basic rate taxpayers and 9.58% for higher rate taxpayers.

But what if you've already used up your ISA allowance? Don't despair. You don't need to stick your money in an account with a rubbish rate, that won't beat inflation. It is still possible can still get a good return on your cash.

You simply need to look off the high street.

Zest for Zopa

Have you ever noticed that the rate of interest banks lend at is far higher than the rate of interest you get on your savings?

The discrepancy between these two rates is how banks make a profit on your savings.

Fancy keeping that profit for yourself? That's why I like Zopa. As the founder, Giles Andrews, explained in our recent Money Talk podcast, Zopa offers you an innovative alternative to sticking your money in a bank.

Basically, it works by allowing you to lend your money directly to borrowers, at a competitive but market-leading rate of interest, usually over a three to five-year term (although one-year terms are available).

How come the interest rate is market-leading? The cost of borrowing on a credit card or loan is still high due to the credit crunch - and has not, as yet, been affected much by the cuts in interest rates. So it's relatively easy to both undercut the banks by offering borrowers a lower rate and still beat the savings rates available on the high street.

For example, Zopa lenders received an average return of 9% over the past year. Of course, this may change next year, as there are no guarantees. It entirely depends on what happens to the demand for and supply of credit.

Beware: this is not the only reason why using Zopa is a riskier and more unpredictable way of saving than placing your money in a bank.

Firstly, the borrower may default on the loan you have made to them. Zopa does try to offset this risk by spreading the money you invest across many different borrowers, and it claims that less than 0.2% of borrowers defaulted over the past year. But at the end of the day, there is a small risk you will lose your money.

Secondly - and perhaps most importantly - your savings will not be protected by the Financial Services Compensation Scheme. With a bank, your investment should be 100% safe, as long as you save less than £50,000, and live in the UK.

These are risks you may be prepared to take to get a higher return. (You can see what other fellow Fools think on this thread on our new Q&A tool, here.)

But if this is not a risk you want to take, there is another way to get a market-leading return off the high street - and it also happens to be the absolute safest place to stash your cash.

The certainty of certificates

National Savings & Investments (NS&I) savings certificates are backed by the British Government. This is the savings equivalent of putting your savings in a nuclear bunker (only better, because they wouldn't earn any interest in the bunker).

At the moment, NS&I are offering a fantastic, tax-free return of RPI plus 1% on its three- and five-year certificates.

What's RPI? It stands for the Retail Price Index, a measure of inflation. Currently, it's at 4.2%.

So the certificates are paying 5.2% AER right now. And the best thing is, even though the return is tax-free, it doesn't count towards your ISA allowance. So you can have savings in an ISA and a certificate, and you won't be taxed on either.

Here's how these savings certificates currently shape up for different taxpayers:

It's also worth noting that these certificates pay nothing if you take your money out within the first year. And you can only invest a maximum of £15,000 per certificate.

Plus, you should be aware that inflation is falling sharply at the moment, so it is likely these rates will fall in the coming months. But however low it goes, you'll have the peace of mind of knowing you will always beat it by 1%, tax-free.

Whatever you do, don't  limit yourself to the savings accounts offered by the high street banks. No doubt it's been a tough year. But with a bit of creativity and determination, you can still make the most of your savings  - and get richer into the bargain!

More: Listen to our podcast on Zopa | Chat about it on Q&A

> Compare savings accounts at Fool.co.uk