Savings Interest Rates - What next ??

Savings Interest Rates, what next?

Savings Interest rates are closely linked to the Base Rate set by the Bank of England.  The Base Rate hit an all time low of 0.5% in March 2009 and has been stubbornly stuck there since.  So what should you do with your money ?  Gamble it all on the lottery or roulette – well we have some suggestions for much safer options to give you a return on your cash.  Read on to find out more ..

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FIxed Term Bond

What is a Fixed Term Bond ?

In simple terms a fixed term bond gives you an agreed rate of interest over a set period of time.  eg.  4% interest over a 4 year period.  These types of investments are perfect if you have a lump sum you want to put away over a longer period of time and won’t need access to the money.  This may seem straightforward but there are a few questions to ask before deciding which is best for you.

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Index link your savings

With inflation now running at a high level and the stock market in turmoil, there is only one place that offers savers real risk-free returns without paying a penny in tax.

National Savings & Investments’ index-linked savings certificates continue to be hugely popular – and it’s not hard to see why.

Not only have they delivered better returns than any high street bank or building society account; they have also outperformed many riskier investment accounts.

savings
Photo Credit – http://www.flickr.com/photos/rmgimages/with/4882451468/

For savers the real selling point is that their money keeps its purchasing power. The same can’t be said of most high street savings accounts, which that are losing money in real terms once tax and inflation have been taken into account.

Savers can invest up to £15,000 in these certificates, and will get a return equivalent to RPI (currently 5pc) plus 0.5pc over the five-year term. Not surprisingly, money has poured into these “linkers” – a total of £6.5bn was invested in just two months after NS & I reissued the savings plans earlier this year.

If you had invested the full £15,000 in NS & I linkers 10 years ago are now sitting on a nest egg worth £23,746 – an annualised return of 4.7pc. This is despite the fact that inflation has been low for much of this period. Over the same period, the average corporate bond fund has produced annual returns of just 3.7pc, while the average equity income fund has returned 3.6pc – both of which could be taxed if held outside an Isa or pension.

Savers should also ensure that they had some money in an instant-access account for emergencies, but savings certificates should then be their next port of call. Investing in equities can be a good long-term bet against inflation, but, as we’ve seen recently, shares can be volatile and you need to be prepared to shoulder this risk.

Although there have been very few new issues of savings certificates in the past two years, NS & I has in the past launched two or three issues a year. Those who have stuck with these savings products can now have sizeable sums protected against inflation.

Inflation

Protect your savings from inflation

Inflation running far ahead of the Bank of England target, most savers are finding that their money is worth less by the day. There are steps that savers can take to avoid inflation eroding their savings.  Below we look at the most popular options.

GDP projection based on market interest rate expectations and £200 billion asset purchases, August 2011
Photo Credit - http://www.flickr.com/photos/bankofengland/6029057463/

Inflation-linked bonds and accounts

Some banks and building societies have launched inflation-linked products for those concerned about their cash losing value. But, it can be difficult to work out which ones are best for you, and some tie your money up for a long time.

Bonds from National Savings & Investments have the advantage of not requiring you to pay tax on your interest, and offer 0.5pc above the RPI when held for five years. However, you can take your money out earlier and still get a return as long as you hold them for at least a year. You can put in £15,000 per issue. 

 ISAs

For those who pay tax on their interest it is almost impossible to outrun inflation.

This makes it more important than ever to use your tax-free cash ISA allowance of £5,340 a year. The best rates are available to those who are willing to put their money away for five years, and include Northern Rock’s fixed-rate Isa paying 4.26pc over five years, just below June’s CPI figure. With inflation predicted to fall back from here in the coming months, this product should help your cash to maintain its value.

Mortgage overpayments

Another option to avoid inflation on your savings is to make overpayments on your mortgage. By offsetting your savings against your debt, you effectively end up with an interest-free savings rate at whatever rate you are paying on your mortgage.

For many people this will be better than a top-paying savings account. However, you need to make sure that you do not fall foul of your lender’s rules on overpayments. Some mortgages are fully flexible, allowing you to make overpayments and get them back freely, while others do not allow you to take overpayments back, or will charge you if you make too many.

Top paying savings account

If you want total security for your savings and have exhausted all other options and used your tax-free allowance, the best you can do is to find the best paying home for your money. You will get more interest if you tie up your money for longer, but the tax, if you have to pay it, is likely to take the total return way below inflation.

Lower-risk investments

If you want to take on more risk, a portfolio of dividend-paying shares can help you to outrun inflation. This is only an option for those with a diversified portfolio and who can withstand (both emotionally and financially) the ups and downs of stock markets. The good news is that after a dreadful couple of years, the number of companies increasing or reinstating dividends this year outnumbers those that cut or cancelled payouts in 2009.

But investors might prefer to buy funds than invest in a spread of dividend–paying companies, which tend to be equity-income funds. These funds have had a tougher time than many over the past three years, but are starting to come into their own as dividends make a comeback.

Bargain Baby Supplies

Its time again for one of Asda’s Baby and Toddler Events – these popular events bring together some great savings for mums.
The event runs in store and online from the 19th Jan – 6th Feb 2010 but is usually repeated later in the year.

Some of the best buys include:

Johnson’s baby toiletries from only £1 each, Nappies from £8.00 f0r a mega box and deals on baby wipes.  There are some great deals on baby essential buys such as a microwave bottle steriliser, car seats and dummies.  There are even potties for toilet training at only £1 so you can buy one for each bathroom and an extra for grandmas too !