If you're patient and disciplined, you can earn ultra-high rates of interest on your spare cash. Here's how.
As a saver, your goal is to earn the highest rates of interest on your spare cash, without having to jump through too many hoops to do so.
Hence, for most people, a high-interest, no-notice savings account is the ideal place for their nest egg or emergency fund. At the very least, you should aim to find an account which pays the Bank of England's base rate (currently 5.25% a year) before tax is deducted. The Best Buys in this category for a deposit of £250+ include the Icesave Easy Access account (5.7% AER) and the ICICI Bank HiSAVE account (5.65% AER), both of which come with rate guarantees.
However, if you're patient and are willing to lock away your savings for months or even years, then it's possible for your savings to earn before-tax interest rates in excess of 6% a year. Here are three ways to do so:
1. Fixed-rate savings accounts
According to the Best Buy tables of independent financial researcher Moneyfacts (which powers the search engine in our savings centre), these are the three highest-paying fixed-rate savings accounts:
Provider | Account | Interest rate | Minimum |
|---|---|---|---|
Heritable Bank | 3 Yr Fixed Rate | 6.11 | 1,000 |
Birmingham Midshires | Fixed Rate Bond | 6.05 | 1 |
Leek United BS | Fixed Rate Bond | 6.00 | 1,000 |
So if you can stash away a pound or more for the next twelve months, you can earn a fixed 6.05% AER with Birmingham Midshires, which is a market-beating rate on small sums.
2. Guaranteed Income Bonds (GIBs)
Guaranteed Income Bonds aren't savings accounts at all -- they are bonds sold by insurance companies. The advantage of GIBs is that your capital is guaranteed (assuming that the provider doesn't go bust), plus they pay a fixed income net of basic-rate (20%) tax, so they are popular with older savers who want both their capital and their income to be secure.
Independent financial adviser Baronworth Investment Services publishes a weekly guide to GIBs; here are the Best Buys from its latest survey:
Best Buy GIBs for £20,000, paying annual interest
Term | Company | Net rate | Equivalent for | Equivalent for |
|---|---|---|---|---|
One year | Pinnacle | 4.72 | 5.90 | 6.29 |
Two years | Pinnacle | 4.67 | 5.84 | 6.23 |
Three years | Pinnacle | 4.61 | 5.76 | 6.15 |
Four years | AIG Life | 4.56 | 5.70 | 6.08 |
Five years | AIG Life | 4.50 | 5.62 | 6.00 |
For higher-rate taxpayers in particular, these rates compare very favourably with those paid by bank and building society accounts.
3. National Savings Certificates
Finally, if you want to earn the equivalent of 6% a year before tax, you can look to the "government's piggybank", National Savings & Investments (NS&I). NS&I offers two products which pay tax-free interest: Fixed Interest Savings Certificates and Index-linked Savings Certificates. What's more, as these products are guaranteed by "the full faith and credit" of the British government, they are the safest investments that you can buy.
Here are the highest-paying Savings Certificates at present:
Fixed Interest Savings Certificates
The two-year 35th Issue pays a guaranteed compound rate of 3.65% AER, which works out at 4.56% for basic-rate taxpayers and 6.08% for higher-rate taxpayers.
Now for the only savings product which is absolutely guaranteed to beat inflation, as measured by the Retail Prices Index (RPI):
Index-linked Savings Certificates
Product/Term | Tax-free rate | Equivalent gross rates |
|---|---|---|
3-year 14th Issue | RPI plus 1.15% | Basic rate: RPI plus 1.44% |
5-year 41st Issue | RPI plus 1.10% | Basic rate: RPI plus 1.38% |
If the RPI were to remain at its current level of 4.4% (though this is unlikely, as inflation is expected to fall in the face of higher interest rates), the three-year Issue would pay a handsome tax-free interest rate of 5.55%, which is worth a whopping 9.25% a year to a 40% taxpayer. Wow!
So, there you have it: three ways to earn more than 6% a year before tax. What are you waiting for? Go get your savings sorted out today!
More: Use the Fool to find superior savings accounts.