The best ways to save for the short term
Here are the best ways to save if you think you'll want to access your cash in the near future.
It’s hard to choose a savings account if you think that you may need to access your money soon. All the best accounts come with long lock-in periods, so you have to accept less attractive rates in order to preserve your ability to access your cash quickly.
As a result, if you want instant access, it’s crucial that you hunt down the best account available. Let’s look at the most attractive options.
Cash ISAs
If you haven’t used your cash ISA allowance for this year - £5,340 for 2011/12 - you should definitely start here. With a cash ISA, you won’t have to pay any tax on your interest, and that can make a big difference to your overall return.
Right now the top instant access cash ISA is Cheshire Building Society’s Direct Cash ISA. If you deposit £1,000 or more, you can earn 3.06% AER on your cash.
This is a variable rate account but it includes a 2.06% bonus until the end of September 2013. So you know that you’re guaranteed to get at least 2.06% a year for the first 20 months you have the account.
3.06% is a decent instant access interest rate - especially since it’s tax-free. If you’re a basic rate taxpayer, you’d need to find a conventional savings account paying 3.82% to deliver an equivalent return. If you’re a 40% taxpayer, you’d need to find a conventional savings account paying 5.1%.
If you have less than £1,000 to save, then take a look at Newcastle Building Society’s Bonus ISA (Issue 2). You only need £1 to open this ISA and it pays 3.05% interest including a 1.35% bonus for 12 months. You can access your money immediately as long as you don’t make more than two withdrawals per year. If you make a third withdrawal, the account is closed.
It's possible that you're able to save more than £5,340 a year in cash. If that's the case, you need to figure out how much money needs to be accessible in the short-term and how much is 'long-term money.' Put the 'long-term money' in the ISA first. If any of your ISA allowance is left over for the year when you've done that, then put some of your short-term money in too.
Just remember that if you've already paid in the full ISA allowance for the year, and then you withdraw some cash, you can't top the ISA back up to £5,340. Read more in All about Cash ISAs.
Instant access savings accounts
Once you've used up your ISA allowance, an instant access savings account may be the best option.
The current top-paying instant access account is the Santander eSaver which pays 3.1% AER and includes a 2.6% bonus for a year. The minimum balance is £1 and you can make unlimited withdrawals by phone and online.
It’s great that it’s so easy to access this Santander account; it’s just a shame that the interest rate isn’t higher.
If you can possibly lock your money away for just one year, you can get a bigger return by going for a one-year fixed rate bond. You also get the security of knowing that your rate won’t change over the year.
You can get 3.6% AER with the FirstSave 1 Year Fixed Rate Bond 18th Issue. You can get the same rate with the AA 1-year Fixed Rate Bond.
Saving the best until last
Still, even 3.6% isn’t that great a rate, so I’ve got one more idea for you. In fact, I’ve saved the best until last!
You could actually get a 5% return if you opened a current account. To be precise, the Santander Preferred Current Account. You’ll get a fixed rate of 5% AER on balances up to £2,500 for the first year you have the account. There are only two catches. Firstly, you must pay £1,000 a month into your account, and secondly the offer isn’t available to existing Santander current account customers.
And you won’t just benefit from a very attractive interest rate. You’ll also get a £100 reward for switching account, and if you already have a mortgage with Santander, you could get a £200 bonus. If you have £10,000 in a Santander savings account as well, your total switching bonus could be £300!
I should add that Santander does have a poor reputation for customer service, but the Spanish bank has made a big effort to combat this problem and it says that the number of complaints is falling. So I think this account is a very attractive option for many people.
And if you’d rather leave your current account where it is, I recommend you go for one of the top-paying cash ISAs. Good luck!
More: Why banks are good to us | Post Office launches new issue of inflation-linked bonds
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Comments
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Ed You are talking about saving but showing where to invest a lump sum short term. I would have thought that saving would be best in a 12 month fixed rate monthly saver for which you can get at least 4%. Mike
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Hi Becki, Thanks for your comment. I can see your point. So let me explain my position: many people don't save more than £5000 in cash each year; so for them, a Cash ISA is a sensible option. It doesn't matter whether they're saving for the short-term or the long-term - they should stick the money in a Cash ISA. The only question then is the kind of account they should use within an ISA - instant access, bond etc But if you're saving more than £5000 in cash each year, and you think you'll only need short-term access to some of that money, then yes, I'd put the long-term money into a Cash ISA and the short term into an instant access account or the Santander current account. I didn't make that point clear in the piece. I've now made a small amendment. Thanks for pointing this out! Ed
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Ed, I cannot believe that you are advocating that people use cash ISAs for money they know they will be needing soon. Cash ISAs should be used for money people want to lock away for a reasonable period of time, as once the money has been taken out, it cannot be replaced without using the current years ISA allowance. Say for example, I put my ISA allowance into a cash ISA at the end of April which I know I will need in September. Once I have taken it out in September I cannot put any more money into a cash ISA that tax year, even though I may save more money after September. For those who know they will not use their ISA it can be a great way to get extra interest. But for those of us who are fortunate enough to use their ISA allowance for longer term savings, this is nonsensical for short term savings. IMO, the article should be clearer that your ISA should be used for longer term cash savings as a first resort, and short term savings as a second option. Although the article alludes to this "If you haven’t used your cash ISA allowance for this year", there are some people who wait until the last minute before committing savings to ISAs because they know, if they need it, it cannot be put back in later.
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15 February 2012