A new report by the Financial Conduct Authority (FCA), has warned that millions of savers are missing out on the best interest rates, because they are not moving their cash to the best paying accounts.
The report found that savers who opened an account five years ago and have stuck with it since are getting interest of just 0.3% per year, well below the rate of inflation. Even accounts opened in the past year with the larger banks and building societies, only pay an average interest rate of just 0.5%.
The FCA is now consulting on ways savers can be encouraged to switch accounts, in the meantime here are our six top tips to help you get a better rate of interest on your savings.
#1: Take an interest in your savings
Millions of savers are missing out on the best interest rates simply because they can’t be bothered to switch savings accounts.
To be blunt, no one is going to do the hard work for you, it’s down to you to track down the best interest rates and then move the money to the right account.
It is worth all the effort though. You will be rewarded with more interest and hopefully a real return above inflation.
Don’t be taken in by adverts in the newspapers, online or on television, they are just that, adverts, designed to win your business.
Instead use independent best buy tables, like the ones we publish which can be found here, to get the best rate for your circumstances.
#3: Fix, but not for too long
A fixed rate will usually pay a higher rate of interest than an instant access account and the longer you fix, the higher the rate.
But beware of fixing for too long.
Interest rates are set to rise later this year or next, be careful not to tie yourself in to an account, which you can’t get out of when rates rise.
#4: Use your new ISA allowance
This won’t help you get a higher rate, but using an ISA (Individual Savings Account) means you’ll get to keep more of the interest you get.
Put simply, you don’t pay any tax on the interest you get from holding cash in an ISA.
You can now put up to £15,000 into a Cash ISA each year, don’t miss out, make sure this is the first place you put your savings, before you look at other types of account.
#5: Consider ‘different’, ‘new’ or ‘unusual’ banks and building societies
After the credit crunch, some banks and building societies disappeared, but we’ve also seen new ones enter the market.
Perhaps the best known example is Metro Bank, but there are others, which you might not have heard of or used before. Banks like the Punjab National Bank, FirstSave and Axis Bank, to name just three, will be new to most people, but pay competitive rates, are fully regulated here in the UK and are members of the Financial Services Compensation Scheme (FSCS).
Savers looking for the best rates need to consider all banks and building societies and not simply go to the household names, which is one of the problems highlighted in the FCA report.
#6: Consider Peer to Peer lending
Peer to peer websites match lenders and borrowers, who can be either individuals or businesses. A lender will commit their capital, which will then be lent out to a large number of individuals or businesses.
The return you get is based on a number of factors, including the interest rate charged to borrowers, the fees you pay and the rate of defaults, when people or businesses fail to make repayments.
Returns from Peer to Peer lending are higher than those from a traditional bank account, but there is obviously more risk; if a borrower defaults you could lose some of your capital. Remember too that your capital isn’t protected by the FSCS.
For those savers really fed up with poor returns and who don’t have the patience to wait for interest rates to rise, Peer to Peer could be an option, but only if you are prepared to accept the extra risks.
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