Money
Managing your money
Make your savings work
The banks want our money. Correction. The banks need our money, because they are finding it very hard to borrow from each other, writes Paul Lewis
That means they are willing to pay us top rates to get their hands on our savings, so there has never been a better time to make sure every penny we have in the bank is earning its keep. You should aim to get at least 6% on your savings and another 1-2% above that on fixed-term savings. Even cash in your current account should earn money.
Cash ISA
The first stop is a cash ISA. It is just a savings account where the interest earned is free of tax. The one restriction is that you cannot put more than £3,000 into it this tax year. You can take money out when you like but if you have already put in the maximum in that tax year you cannot put it back.
In 2008/09 the limit rises to £3,600, so you can put £3,000 in now and another £3,600 on April 6. Because they are so flexible, cash ISAs are good even if you are just saving up for a holiday. You can move money from one ISA to another without losing its tax-free status, as long as you let the banks make the transfer.
Banks can impose their own rules on ISAs. Some demand a minimum payment in or want notice before you take money out. And some will not allow transfers from other ISAs. Generally, accounts with these restrictions are best avoided.
Savings accounts
If you have £1,000 to save the top accounts pay more than 6%. But some pay very little – 2% or less. If you have one of those, move your money as soon as you can. But be aware of the cunning tricks banks try to tempt you with:
* Withdrawal penalty. Some banks penalise you for taking your own money from your savings account. Some pay no interest in the month you make a withdrawal. Both turn a good rate into a bad one. Avoid them.
* Bonus rate. About half the savings accounts in the top 10 are there only because they offer you a higher rate for the first six or 12 months and then the rate drops. Avoid these too.
* Notice required. Some accounts make you wait for your money – anything from 30 days to six months. If you wish to tie your money up, a bond account (see below) will normally pay you more.
* Regular savings. These accounts offer a very high rate of interest, but you have to pay in a certain amount each month and the account lasts for only a year. So most of your money earns that high rate for just a few months. On average your money will earn about half the advertised rate. Do not be fooled.
* Over-50s offers. Many banks offer special deals to people over 50 or over pension age. Some are among the top-paying accounts, but you may be able to get more elsewhere.
Very few accounts are good value year after year. Having attracted their customers the banks then let the rates slip. So check your account every year at least.
Fixed-term savings
If you are willing to have your money tied up for a year or more you can get better rates in what are called bond or fixed-term accounts. This must be money that you definitely will not need for the length of the term. Some require only a short period – even as little as three months – and rates are often very good. Others commit you to between one and five years. At present, shorter periods offer better rates.
Tax
Tell the bank if you do not pay tax – this year that means an income of less than £7,550 if you are 65 to 74 and next year that rises to £9,030. Allowances are slightly more if you are over 75 and rather less if you are under 65. Your interest will then be paid gross without tax being deducted. Couples should consider moving the money into the name of the person paying no tax or tax at a lower rate.
Current accounts
Most banks pay a standard 0.1% on money in a current account. That means if you have £1,000 in there for a year it will earn just £1 (and if you pay tax that will be cut to 80p). But some pay a lot more – aim for at least 4%. Generally the best deals are to be found among the building societies. The banks are more likely to make tempting offers that are not quite what they seem.
* Good interest on first slice. The interest rate looks good but it only applies to a certain amount of the balance – usually between £1,000 and £2,500. Anything above it will normally earn the standard 0.1%, so keep money in your account below the level to earn the best rate.
* Good interest for a while. Some accounts will offer you a bonus rate of interest for the first six or 12 months. After that it drops to a much lower rate. Avoid them.
* Minimum payment in. Some banks will offer better interest if you pay a minimum amount into the account each month - usually £500 or £1,000. If your pension or pay after tax is more than the limit, they can be a good deal.
* Monthly fee. Some accounts tempt you in with higher interest but then charge you a monthly fee which is more than the interest you earn. For the fee you will get things you may not want or need – usually insurance products. Best avoided.
* Linked products. Some accounts pay you a better rate if you also buy another product such as an investment or a mortgage. This is just a marketing ploy for the other product and is best refused.
Moving a current account
It used to be difficult to move a current account but nowadays it should be relatively simple. Open the account with your new bank. Tell your old bank you are moving to the new bank.
The old bank must co-operate fully with the move and has to tell the new bank about all your standing orders and direct debits within five days. However, if you have any regular payments into your account, you will normally have to contact the payers yourself to inform them of the change. Once the new account is running, check that everything has been transferred.
Safety
Money in a bank or building society is safe. The problems at Northern Rock showed us just how safe it is. The first £35,000 in any bank or building society is covered by a guarantee – you will always get that back if the bank fails. The super-cautious who have more than that might want to split the money between different banks – but make sure they are unrelated or the £35,000 limit will apply to all. Husbands and wives get separate protection, as do joint account holders.
Best-buy tables
It is impossible to choose between the thousands of savings products without help. If you have internet access you can check the best rates from comparison sites like moneysupermarket.com and moneyfacts.co.uk. There is also an official set of tables at fsa.gov.uk/tables.
If you do not have a computer at home, use one at your local library. Newspapers publish more limited best-buy tables.
Comparison sites are useful guides but try at least two and beware the accounts that appear above the tables but are in fact adverts. Not all accounts, particularly those from smaller building societies, are in the comparison tables. Always check the terms and conditions of any account carefully before committing yourself to it.
* Written by Paul Lewis. Paul’s opinions are his own and for general information only. Always seek independent financial advice.
* This article first appeared in the February 2008 edition of Saga Magazine.
