Banks typically pay us so little interest that we struggle to keep up with rising prices. Sometimes, even the best savings accounts are not paying us enough.
When you're earning around 3% AER in a top easy-access savings account, after deducting tax from that, all taxpayers are currently losing out to inflation as measured by the Consumer Prices Index (CPI). Basic-rate taxpayers are just about holding their own against the current inflation rate as measured by the Retail Prices Index (RPI), but higher-rate payers don't cut it at all.
Inflation versus our savings
|
RPI* |
CPI* |
Interest after tax on savings at 3% AER (Basic-rate payer/Higher-rate payer) |
|
2.4% |
2.9% |
2.4%/1.8% |
*These figures are for the 12 months ending December 2009. New figures for the 12 months ending January 2010 will be published by National Statistics on 16 February. Read about both measures of inflation here.
By any measure, it's hard to beat inflation using savings accounts alone, unless were prepared to lock our money in for a long time to secure better rates. Currently we can get around 4%-5% if we're prepared to tie our money up for three years or more in a fixed rate bond. But there's a huge risk here if inflation continues to rise quickly, you'll end up even worse off.
What this means is that, if you remain complacent about what you do with your savings, as time goes by, they will be able to buy less and less stuff.
Earning some interest is better than nothing and it greatly helps to reduce the damage caused by inflation. However, by putting a little effort in, we can not just keep up with average inflation, but we can beat it most of the time. To do this, we must regularly look for special opportunities. Today, I'm writing about such a one.
Earning the equivalent of 15% interest
This opportunity begins with using the Halifax Reward Current Account to earn about 15% gross interest (AER) and, with some cleverly-timed direct debits you can earn even more. (Note: don't confuse this with the Halifax Ultimate Reward Current Account, which is not free and costs £12.50 per month.)
The Halifax Reward Current Account will pay you £5 net for every month that you credit £1,000. All you have to do is set up a direct debit of £1,000 from your main current account to this one and you'll earn £60 per year after the bank deducts basic-rate tax. (Alternatively, you could make this your main current account and pay your salary in.) Higher-rate payers will need to pay an extra £15 through tax returns, so will receive £45 net.
I think it's reasonable to assume that most of you would need to spend the £1,000 you credit to this Halifax account during the month, so you might set up some direct debits to come from it to pay your regular monthly bills. On average, then, you might expect to have about £500 in this account (with £1,000 at the start of the month and about zero at the end). On that basis, you're effectively earning a gross interest rate of 15% per year.
Why this is a big deal!
OK, so this is 15% on just £500, and that may not seem worth the effort to you. However, as I said at the beginning, these special opportunities can help you boost the overall rate of your savings from something that doesn't beat inflation to something that does...
Let's say you also have £4,500 in a decent savings account earning 2.75% gross (AER). Your typical balance of £500 is probably earning nothing in your existing current account, so your overall interest rate on the £5,000 is just 2.5%. (That's 2.75% on £4,500 plus 0% on £500.) This means that, after deducting tax, you're earning a fair bit less than inflation by any measure.
But now, with the help of that £5 per month, your total gross interest rate on the £5,000 is boosted to 4%. (That's 2.75% on £4,500 and 15% on £500.) After tax, basic-rate payers are now beating inflation by any measure, whilst higher-rate payers are now at least matching the RPI measure.
These sorts of steps are necessary if we want to ensure we beat inflation over the long run, and even if we can just match it the rest of the time that'll help to preserve our savings.
Earn even more
However, we can improve the returns of this special opportunity I've identified even further with two techniques:
Firstly, if you're married you can both open individual accounts to double the benefit and earn £10 per month.
The second way is:
1. Receive the £1,000 in your new Halifax account.
2. Shortly after, transfer it back to your main current account if it pays you any interest. This way, you'll earn the £5 reward plus interest on the same money!
For the hardcore savers, both of these techniques could boost further the overall return on your £5,000 of savings to around 6% before tax, meaning that even higher-rate payers defeat inflation after tax! (I've assumed your main account is the Alliance & Leicester Premier Direct Current Account, which for a year pays 6% on the first £2,500 in your account. The £2,500 limit may make it a little awkward for higher-rate earners, but with a little thought I'm sure you can find a special opportunity of your own to get around this!)
If you want to calculate the total interest you're earning on all your savings and current accounts but need a hand with the maths, why not ask our helpful readers at Q&A? They could even help you find some more special opportunities. And join our Build up your savings goal for more tips on making the most of your cash.
Open a Halifax Reward Current Account for the £5 monthly reward. (The Bank of Scotland Reward Current Account is identical.)
Open an Alliance & Leicester Premier Direct Current Account for 6% interest for a year on the first £2,500 in your account.
Open a savings account or cash ISA (a tax-free savings account) through lovemoney.com.