Earn 50 times as much interest on your savings

by Cliff D'Arcy on 10 July 2011  |  5 comments
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Ditching these 71 dreadful savings accounts will give your savings a massive boost!

What's the point of saving these days? After all, with the Bank of England's base rate stuck at a low of 0.5% a year since March 2009, savings rates are testing all-time lows.

Despite this, I firmly believe that every one of us should keep some spare cash in an easy-access savings account. That's because, in times of financial trouble, nothing beats having a hefty lump of cash at hand.

The 0.1% savings swindle

Alas, one big problem with saving is that we're spoilt for choice. Indeed, last month, you could choose from 2,385 savings accounts, which is an all-time high. This baffling variety causes 'paralysis by analysis' -- faced with such a wide range of options, millions of us do nothing.

Banks, building societies and other savings providers love this customer laziness, which they call inertia. It means that they can offer rubbish rates to loyal savers, while reserving their best rates for new customers.

To show you how low savings rates can go, I asked Moneyfacts to provide me with a list of all savings accounts that pay 0.1% a year or less on balances up to £5,000. Amazingly, I discovered the following:

• Two savings accounts (Melton Mowbray BS Offset Share and Marfin Laiki Bank Instant Access) pay no interest at all (0%) on balances below £5,000;
• Two more accounts (Ulster Bank Easy Access Savings and Cambridge BS Instant Access Reward) pay 0.01%;
• 22 accounts pay 0.05%;
• One account -- Turkish Bank (UK) Basic Savings -- pays 0.08%; and
• 44 accounts pay 0.1%.

In total, 71 different savings accounts (see below) pay between 0% and 0.1% on balances up to £5,000. Also, bear in mind that these are before-tax rates so, after taking off 20% for basic-rate tax, the highest after-tax rate paid by these accounts is a pitiful 0.08% a year.

In other words, the best of these accounts will pay £4 a year on a balance of £5,000. Frankly, that's a shocking savings swindle.

Switch and save

I can't tell you if you've got any money stashed away inside these (or equally awful) accounts. Clearly, it's up to you to find out, by checking your statements, calling your bank, or checking its website for up-to-date savings rates.

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Even so, I suspect there are countless billions of pounds rotting away in these and similar shoddy savings accounts.

In fact, according to the Office for National Statistics, we Brits had £1,184 billion squirreled away in cash and currencies at the end of 2009. If only, say, a quarter of this sum were stashed away inside inferior accounts, this would mean a staggering £296 billion is gathering dust instead of earning decent rates of interest!

Accounts for every saver

Obviously, the simple solution to this problem is to ditch and switch accounts. And the four types of savings accounts I'm about to highlight should appeal to every British saver:

1. Easy-access accounts

An easy-access savings account offers you quick access to your money without penalties, either immediately using a cash card or passbook, or via online transfers to your current account.

The four Best Buy accounts in the table below all pay 3%+ a year while offering access to your cash. Just be warned that the Nationwide BS MySave Online Plus Account only allows one penalty-free withdrawal per year. Further withdrawals are subject to a loss of bonus and a lower interest rate of 0.10% in the month the withdrawal was made.

As you can see, these accounts pay at least 30 times as much interest as the best of the 71 shoddy accounts I mentioned above. However, patient savers can earn even higher rates of tax-free interest.

2. Tax-free cash ISAs

Individual Savings Accounts, or ISAs, are the UK's most popular tax haven. Indeed, around 20 million UK savers and investors use ISAs to protect their savings interest, share profits and dividend income from the taxman.

Here's a list of the top four instant-access, variable-rate cash ISAs on offer today:

As you can see, the Santander and HBOS ISAs require you to pay into linked accounts, so they come with strings attached.

Hence, my favourite ISA from the above list is the AA Internet Access ISA, which pays 3.35% on £1+. However, this account includes an introductory bonus of 1.65%, so it's good only for a year, and it also doesn’t allow transfers in from existing ISAs.

3. Regular-savings accounts

With regular-savings accounts, you put aside a set amount each month for a fixed period, usually a year. Here are four table-toppers in this category, all of which pay at least 4% before tax:

* Rate includes 2.15% bonus in first year.

If you don't have a lump sum to save, but can spare between £1 and £250 a month, then these are ace accounts for monthly saving. However, do be sure to meet every monthly payment for a year, otherwise your interest rate will plummet. Also, you should review these accounts after 12 months, as rates generally plummet from this point onwards.

4. Fixed-rate accounts

If you're prepared to lock away your cash for years, then these three long-term, fixed-rate accounts offer some of the very highest rates of interest around:

* Must have or open a State Bank of India savings or current account.

Appendix: my 71 shoddy savings accounts

Finally, here's a list of all 71 sub-standard savings accounts I mentioned earlier. This is sorted by provider, so you can quickly check to find out if your money is mouldering in these accounts.

Good luck with finding a superior savings account, and remember: don't delay, act today!

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