Not everyone is complaining after the Bank of England boosts interest rates -and there have been five interest rate rises in the past year taking the base rate to 5.75 per cent.
While homeowners are complaining about soaring mortgage costs savers are cashing in – or should be!
It is now possible to earn more than six per cent on your savings at firms such as HSBC without taking any risk with your money. The last time interest rates paid on bank and building society accounts were this good it was 2001, so it should be happy days for savers.
Of course not all savers are doing well – millions still have cash stuck in poor-paying accounts. MoneyExpert has discovered that the worst accounts pay as little as 0.25 per cent, which is barely worth having. Anyone with an account which pays as little as that would be as well sticking the cash in a drawer at home.
On £5,000 you’ll earn just £12.50 in interest in a year in an account paying 0.25 per cent. And that’s before tax at 20 per cent which cuts your interest to £10.
By contrast in an account paying six per cent you’ll earn £300 in a year before tax of 20 per cent cuts you down to £240. If you’re a higher-rate taxpayer you’ll have to pay 40 per cent tax.
Savers should be aiming to earn at least five per cent interest on their account if not more.
You don’t have to pay tax on your savings – we can only save £3,000 in a year in a tax-free cash ISA.
Rates there are the same or similar to those in ordinary accounts buy you don’t pay tax so save the 20 per cent or 40 per cent in tax. You can though only put £3,000 in cash ISA in a tax year so if you’ve got more to save you’ll need to look around.
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With basic savings accounts you can choose between instant access accounts and term or notice accounts.
With instant access accounts you can as the name implies get access to your money whenever you want it.
With term or notice accounts you have to give notice – typically seven, 30 or 60 or even 90 days – before you can get your cash.
Generally if you think you believe you’ll need the money in a hurry you should go for an instant access account but if you think you can lock the cash away go for a term or notice account. Rates are similar between the two types of accounts so it’s more a case of the notice account being more of a deterrent to taking cash out. If you can get the money instantly you might be tempted to take the cash whenever you can.
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It is possible to earn up to 10 per cent on your cash if you commit to a regular savings account. However with these you have to pay money in every month for a set term which is generally a year.
Conditions can be tough – if you miss a payment or want to take cash out the rate you are paid drops dramatically. However, if you are saving for something special they can be ideal.
Be a savvy saver
Watch out for special deals such as bonuses. Some firms tempt you in with special bonuses on accounts which last for six months or year. Once the special deal runs out the bonus – which can be one or two per cent – ends and the rate you are being won’t be that special.
You need to be on your toes as well – keep an eye on the rate you are being paid and if you think it’s not up to scratch move your cash.
Don’t get fixated on saving
If you have big debts it makes sense to clear them rather than piling cash into savings. If for instance you are paying 16 per cent interest on a credit card and are earning six per cent on your savings then you are effectively losing 10 per cent a month.
That’s the gap between what you earn and what you pay out. Saving is a good habit to get into but you need to clear your debts first.
And if you are stuck in an account paying 0.25 per cent then it really is time to move.
Savers have never had it so good so it’s time to cash in!
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