Best Savings Accounts

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Five Tips for Making your Savings Account Work Harder

Finding a good bank account for your savings can be the difference between a poor and a wealthy old age. But managing your savings can be tricky, especially as the UK anticipates an economic slow-down. Here's how to make your nest egg work harder.

Setting Out

Before you even think about setting up a savings account, use any extra cash to pay off your debts. Most debts will cost you more in interest than savings will pay out, so it make sense to become debt free before you begin saving. You should then consider taking out a tax-free Cash ISA – or, if you plan to save a lump-sum every month, a regular savings account. This will pay you a higher rate of interest in return for regular cash injections.

Make Sure your Savings don't Dip

If your savings account offers you a rate that is under inflation after tax, then you will effectively be losing money. For example, if inflation is 7 per cent in 2008 and your savings account pays a 5 per cent interest, the spending power of your money will be reduced. Doing some research into inflation levels before you open a bank account for your savings can help ensure that you don't lose out.

Playing Safe

In the wake of Northern Rock, many savers are concerned about the safety of their cash. Banks rarely collapse, but if yours does then you want to make sure you're protected from the aftermath. All legitimate UK savings companies are signed up to the Financial Ombudsman complains service and the Financial Service Compensation Scheme offered by the Financial Services Authority (FSA). This means that, in the unlikely event of a bank going bust, its customers are given the first £35,000 of the money in their savings account back automatically. A fail-safe way to protect the safety of your savings, therefore, is not to put more than £35,000 in any one bank.

Tricks to Watch

Many savings institutions use introductory offers to draw in new customers, who will then be disadvantaged in the long run. Unless you are prepared to be active with your cash then avoid introductory bonus rates – these are fine for those who shift their money regularly, but they should be avoided by the more easy-going. Some banks will also try to confuse you by quoting different interest rates. Check whether you are being quoted the gross rate (the flat amount paid) or the Annual Equivalent Rate, which takes into account the interest compounded over the year. Knowing which is which will allow you to more effectively compare accounts. You should also remember that interest rates are usually quoted without tax.

Guaranteeing a Top Rate

The majority of savings accounts are variable. This means that it is important to monitor the rate of your account, and to switch accounts if you feel that you aren't getting the best deal. If you don't have the time or the energy to do this, then the best thing to do is to take out a fixed rate savings account. These will give you a decent rate of interest over a longer period, at the cost of locking your cash away for the entire term (anything from a few months to years). You can also make sure that you're getting a reasonable deal by choosing an account that guarantees to match or beat either the Bank of England base rate of the Retail Price Index – the UK's measure of inflation. A number of online companies like Alliance and Leicester offer user guides; a useful tool for understanding what the range of savings accounts actually offer and provide.