Raining your interest
Autumn 2009
With the bank base rate continuing at an all-time low, many savings accounts currently carry a very low rate of interest. How can you make the best of this drop in rates?
In general, the lowest interest rates apply to ‘easy access’ accounts, which give you the benefit of having the use of your money when needed.
A top rate on this type of account is at present about 3%. The payment of 20% or 40% tax (except in the case of ISAs) on the interest makes the cash rate of return even lower. If you can commit yourself to a regular amount of monthly savings, you can probably find a rate of about 4%. There will typically be a long list of conditions and possible penalties attached to these accounts for early withdrawal.
Tying up your savings for a longer period in a notice account can provide you with a higher rate of return (possibly up to 5%), at the cost of less flexibility. The rates offered on these accounts have been falling recently, but it is still possible to find rates higher than those on easy access accounts.
It is often hard to predict how long money can be tied up in an account before it is needed. When you need to access funds, you will normally incur an interest penalty for an early withdrawal – but this can be seen as a route to getting the best of both worlds. You can leave your cash in a notice account until you need to use it. Any funds remaining in the account after a withdrawal will probably generate a lower rate of interest, but at least you have earned a better rate until the money was needed.
As always, it is important to read the small print. Your ability to withdraw funds from a notice account may be limited to a defined number or a capped cash amount of withdrawals during a year, or you may be required to maintain a minimum balance.
Of course, the best rate of return on surplus cash can be obtained in an entirely different way – by paying off credit card and store card balances. Remember that some of them can carry interest rates of almost 30%.
