Low interest rates in recent years have really hammered savers, making it virtually impossible to find returns that will keep pace with living costs.
The reason savings rates are so low is that the Bank of England base rate is currently just 0.1%, and it has been at this level for more than a year. This is the interest rate the Bank pays to other banks which hold money with it, so it influences how much interest we earn on our savings and how much we pay on our borrowing, such as our mortgages, loans and credit cards.
Put simply, when the Bank of England base rate is low, you’ll earn lower returns on your savings, but you should also pay less to borrow money. When the base rate is high, you’ll benefit from higher savings returns, but your debts will cost you more.
Here, we look at some of the ways savers might be able to boost their returns, giving them peace of mind that their money is working as hard as it possibly can.
Consider tying up your savings
If you don’t need your savings imminently, and you’ve got enough set aside in an instant access account to cover any unexpected expenses, such as car repairs or a boiler breakdown for example, you might want to consider a fixed rate savings account. These tend to offer higher returns than easy access accounts, but you won’t usually be able to make any withdrawals during the fixed rate term.
Fixed rate accounts usually run for a range of different terms, typically from three months up to five years, so before signing up, think about when you’ll need to access your money. As a general rule, the longer you’re prepared to tie your money up for, the higher the rate of interest you’ll be offered.
For example, the top rate you can currently earn on a one-year fixed rate account is 0.90% AER from Cynergy Bank although you need a hefty £10,000 to apply. If you don’t have this much to put away, you can earn 0.85% AER from Raisin UK with its one-year Fixed Term Deposit account (provided by Union Bank), and this account can be opened with a minimum deposit of £1,000. If you’re looking for a longer term account, UBL UK pays 1.55% AER on a minimum deposit of £2,000 held in its five-year Fixed Term Deposit account.
If you are considering tying up your cash for the long term, bear in mind that if interest rates rise during this time accounts paying better returns might become available, and you won’t be able to take advantage of these until your bond ends.
Look into peer-to-peer lending – but beware the risks
Putting some of your savings into peer-to-peer lending could also boost the returns you get from your savings, but you must make sure you understand how it works and the risks involved.
When you open an account with a peer-to-peer lending website, your money is lent to other individuals or businesses. You can usually earn much higher returns than you can from standard savings accounts. For example, Zopa, the longest running peer-to-peer site offers a projected annual return of between 2% and 4% on its ‘Core’ product, with a 1% fee charged if you sell your loans before their term ends. You can invest £1,000 or more and there’s no fixed term but Zopa says the best results are available over the mid to long-term, which it defines as three or more years.
Unlike normal savings accounts, peer-to-peer lending isn’t covered by the Financial Services Compensation Scheme (FSCS), which will pay out up to £85,000 per person, per institution in the event they go bust. If something goes wrong with a peer-to-peer lender, however, there’s no such protection, so there’s a risk you could end up losing your money.
However, peer-to-peer websites are regulated by the Financial Conduct Authority (FCA) which means they must follow certain guidelines which protect consumers. Some also have their own ‘provision funds’ in place in the event a borrower doesn’t pay back what they owe. There are still no guarantees that you’ll get back what you put in though, so you should only put in money you could afford to lose.
Take advantage of regular savings accounts
If you can afford to commit from £25 to £300 a month to savings, you might be able to give your savings a boost by drip-feeding them across into a regular savings account.
Most regular savings accounts – but not all – require you to have a current account with the same provider to qualify. For example, you can only sign up for First Direct’s Regular Saver account, paying 1% AER fixed for one year, if you first sign up for a First Direct current account. If you’re a new customer switching your current account to First Direct, you’ll benefit from a £125 switching bonus as well as access to the Regular Saver account.
If you’d rather not have to transfer your current account so you can open a regular savings account, then Coventry Building Society is offering 1.05% AER on its standalone Regular Saver 5 account, whilst Nationwide Building Society pays 1% on its Start to Save account. There’s no minimum monthly amount required, but the maximum you can pay into the Coventry account each month is £500, whilst £100 is the maximum you can pay into the Nationwide account each month.
Regularly review your returns
Once you’ve found a home for your savings which pays you competitive returns, you can’t just sit back and forget about them.
This is especially important if you’ve chosen a savings account which pays a short-term introductory bonus.
Ideally you should check how much interest you’re earning every few months and transfer your savings to an alternative account if higher rates become available elsewhere. This might feel like a hassle, but it’s usually well worth it. You can calculate how much extra interest you’d earn by switching savings provider using the Which? savings booster tool and you can see the current savings best buys at savings website Savingschampion.co.uk.
If you have found a better account to move to, check with your existing provider how you can transfer your savings across to your new account. Some might be able to transfer the money across directly to the new savings account or you might have to move your money into your current account first. If you’re transferring funds held in a cash ISA you must fill out a transfer form with your new ISA provider and they’ll arrange the transfer on your behalf. Don’t close down your existing cash ISA first or you’ll lose the tax-free benefits. You can see which providers are currently paying the best returns in our article Best cash ISA rates – which cash ISAs pay the most interest?
Could investing be right for you?
If you’re saving towards a goal that’s at least five to 10 years away and you’re sick of low savings returns, you might want to consider investing rather than keeping your money in a savings account – but only if you’ve got a strong appetite for risk.
Over long-term periods, shares tend to perform better than cash, although there are no guarantees that this pattern will continue in the future. As recent stock market falls have shown, volatility is part and parcel of investing, so you’ll need to be comfortable with the fact you could end up getting less than you put in. Learn more about investing in our guide to Investing – the basics.
Diversifying your investments can help reduce risk as you won’t be putting all your eggs in one basket. Most people do this through investment funds such as unit trusts, open-ended investment companies (OEICs) or investment trusts, where their money is pooled together with that of other investors and invested across a wide range of different companies and other assets. Find out more about these and other investment terms in our article Investing jargon explained.
You should only consider investing if you understand exactly what your money is going into and what the risks are. If you want help understanding the options available, or you’d like someone to choose investments for you on your behalf, you should seek professional independent financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
VouchedFor also offer a Free Financial Health Check with a trusted, well-rated advisor in your local area so you can see if you think advice might be right for you.
Have you managed to boost your savings returns, using any of the ways outlined above, or by doing something else? If so, we’d love to hear from you. You can join the money conversation on the Rest Less community or leave a comment below.