10 ways to earn the most interest on your savings

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With interest rates so low, where can you get a decent return if you want to keep your money in cash? Here are ten ways to earn the most interest on your savings now.

  1. Easy access cash ISA

If you want to be able to save but guarantee that the interest is tax free forever, then a cash ISA is the best way to do it. If you don’t want to lock your money away or risk having to lose interest if you take some out, then an easy access cash ISA is the best option.

Since I originally wrote this article in March, interest rates on some savings accounts have crept up very slightly. It’s nothing to get excited about, but it’s better than a fall!

As I write this, Virgin Money’s Defined Access E-ISA pays the highest rate at 1.01%. You get this rate if you make three or fewer withdrawals in a year. If you make four or more, the rate drops to just 0.25%. The good news is that you only need £1 in the account to get that rate and you can transfer in money from existing cash ISAs with other providers.

Post Office Money online ISA  also pays 1.01% but you need at least £100 to get that rate, and it includes a 0.76% bonus for 12 months. The AA also pays 1.01% on its easy access cash ISA. Again, you need £100 in your account to get this rate and it includes a 0.81% bonus for 12 months. As with Virgin Money, you can transfer in money from existing ISAs to either the Post Office or The AA.

SAVVY TIP: The AA’s easy access cash ISA is provided by OneFamily, but your ISA is actually with Bank of Ireland. Your savings are protected up to a limit of £85,000, but I found the information on the website about who was actually responsible for your money, rather confusing.

  1. Notice cash ISA

With a notice account you have to tell the bank or building society before you’re able to take money out of your account. You may have to give 30 days, 60, 90 or even more notice. If you don’t give notice, you’ll lose interest for the notice period.

In theory you should get a higher interest rate than if you saved with an easy access cash ISA, but the difference in interest rate can be pretty small.

As I write this, the Hinckley and Rugby Building Society pays 1.2% on its 120 Day Notice Cash ISA You must have a minimum balance of £500. You can operate it in a branch or by post. You can earn an expected profit rate of 1% at the Al Rayan Bank. The cash ISA is a 60-day notice account, with a minimum deposit level of £250.

SAVVY TIP: As the Al Rayan Bank is a Shariah bank, you won’t earn interest. However, you should earn a profit in a similar way as you would with a standard savings account. Your money is protected by the Financial Services Compensation Scheme up to £85,000.

The Mansfield Building Society pays 0.95% on its 60-day notice cash ISA on a minimum balance of £1.

  1. Fixed rate cash ISA

If you can afford to lock your money away (or some of it), you can get a higher rate of interest if you save in a fixed rate cash ISA. As I write this you can get up to 1.8% (with Paragon Bank’s cash ISA) if you save at least £500 in a five year fixed rate cash ISA. Virgin Money’s five year fixed rate cash ISA pays a fraction less, at 1.75% – and that’s on balances of £1 or more.

You may be able to get at your money before the fixed rate term is up (check the details as this varies from ISA to ISA), but you will lose some interest.

SAVVY TIP: Be aware that with most fixed rate cash ISAs, you have to pay all the money in within 30 days of opening it. So, if you only have a relatively small amount to save at the time, but you think you’ll be able to use your ISA allowance later in the year, be aware that you won’t generally be able to top up your fixed rate cash ISA or open a second cash ISA. However, some cash ISA providers will let you keep more than one cash ISA under an ‘umbrella’ and it’s not against HM Revenue and Customs’ ISA rules. You can read more about this in my article called How many cash ISAs can you have in one tax year?

  1. Premium Bonds

The prize rate for Premium Bonds fell to 1.15% from 1.25% in May. This is the equivalent rate that someone with average luck can expect. If you’re a higher rate taxpayer, you’ll do better than someone who’s a basic rate taxpayer or who doesn’t pay tax, because any winnings you receive are tax free.

You can save between £100 and £50,000 in Premium Bonds and all money you have with NS&I is backed by the Treasury. There are currently two prizes of £1 million every month, and over two million prizes of £25 with interim prizes from £50 to £100,000.

You can apply online at NS&I as well as by phone or post. You can read more about Premium Bonds in my article called Premium Bonds – are they worth saving in?

  1. Easy access savings accounts

If you save in an ordinary savings account, rather than a cash ISA, you may be able to get a slightly higher interest rate. If you’re a basic rate taxpayer, you can get up to £1,000 a year in interest tax free, or £500 if you’re a higher rate taxpayer.

Best buys at the moment are 1.1% from RCI Bank’s online saver account. It’s a French bank and it’s not covered by the UK’s compensation scheme. Instead, your savings are covered up to €100,000 by the French compensation scheme.

The Britannia Building Society (owned by Co-op Bank) also pays 1.1% on its Select Access Saver. You only get this rate if you make three or fewer withdrawals a year. You can find out about the savings account on the Co-op Bank website.

If you don’t mind an account paying a bonus, Tesco Bank has an easy access account paying 1.06%. It’s online only but you get the 1.06% rate on balances of £1. The bonus is 0.66% for 12 months.

Bank of Cyprus UK pays a smidge less on its Online Easy Access Account at 1.05%, with a 0.45% bonus.

  1. Fixed rate savings accounts

If you’re happy to leave your money locked away for a few years, or to pay an interest ‘penalty’ if you want to take money out, a fixed rate account will pay a higher rate of interest. As I write this you can get an expected profit rate of 2.5% at the Bank of London and the Middle East with its seven year Premier Deposit Account.  But, the minimum investment is a hefty £25,000 and there’s no early access.

Your savings are covered by the UK savings compensation scheme up to a limit of £85,000.

Otherwise you can get 2.25% from BLME’s five year fixed Premier Deposit Account or 2.25% with Paragon Bank’s five year fixed rate savings. Here, the minimum amount you can save is £1,000. Again, you can’t get early access to your money.

If you don’t want to tie your money up for five years, you can get 2.2% with NS&I’s three year bond. The minimum amount you can save is £100 and the maximum is £3,000.

  1. Current accounts

You may be able to earn more in interest if you keep money in your current account than in a savings account. However, there are normally fairly low limits on the amount you can save, or the higher interest rate only lasts for a fixed term (or both).

Santander’s 1-2-3 current account used to pay 3% on balances between £3,000 to £20,000, but now it pays a flat rate of 1.5% on anything you have in the account up to £20,000. The monthly fee is £5 – so it’s not right for everyone.

TSB’s current account pays 3% interest on balances up to £1,500. Lloyds bank’s Club Lloyds account pays 2% on balances from £1,000 to £5,000, and costs £3 a month. Nationwide’s Flex Direct account pays 5% interest for the first 12 months on balances up to £2,500.

SAVVY TIP: All these accounts have conditions you must meet. Generally, it means you have to pay in a minimum amount and set up one or two direct debits.

  1. Regular saver accounts

To get the best rate on regular saver accounts, you need to have a current account with the same bank or building society (M&S Bank, First Direct, HSBC or Nationwide). As I write this, all pay 5% interest on their regular saver accounts. You can generally save between £25 and up to £250 – £500 a month. The upper limit depends on the provider you’re with.

  1. Lifetime ISA

You have to be under 40 to take out a lifetime ISA (LISA) and you can only open one from April 6th. As with ordinary ISAs, there will be cash and stocks and shares options, but at the moment only one building society – Skipton – has said it will offer a cash lifetime ISA. More are likely to follow in the coming months.

I don’t yet know the interest rate that the Skipton will offer on its LISA as it won’t be available until June.

SAVVY TIP: You can only use a lifetime ISA to buy your first home or you can cash it in after you’re 60. You get a government bonus of 25% and you can save up to £4,000 a year. There’s more in my article called Lifetime ISA – how will it work and should you have one?

  1. Offset mortgage

This isn’t saving in the conventional sense in that you don’t earn any interest. With an offset mortgage, your savings and mortgage are linked and you only pay interest on the difference between your mortgage amount and the money you have in savings.

While you don’t earn interest on your savings, you save interest on your mortgage. The beauty of offset mortgages is that you can get the money in your offset savings account back at any time.

SAVVY TIP: This can make sense for many people but whether or not the maths adds up depends on the offset mortgage interest rate and how that compares to the rate you could get on an ordinary mortgage. There’s a quick guide to How an offset mortgage can save you money in my video.

Thanks to Moneyfacts for all the cash ISA and savings account interest rate information.

Related articles:

Tax-free savings allowance explained; interest of up to £1,000 a year tax free

What is an innovative finance ISA? Innovative finance ISAs explained

10 things you need to know about making a savings claim to the Financial Services Compensation Scheme.

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