If you have money in savings accounts, how can you increase the amount you get? With savings rates so low, your options are limited. But you may be able to switch your current account, try a regular savings account or even consider a peer-to-peer lender.
1. Switch your current account
Most current accounts don’t pay interest when you’re in credit, but some do. Here are the main options:
Lloyds bank’s Club Lloyds account pays up to 4% interest on balances of £4,000 to £5,000. You have to pay in £1,500 a month or you’ll be charged a £5 a month fee.
SAVVY TIP: If you have between £4,000 and £5,000 in your current account you earn 4% on the whole balance. You earn 1% interest on balances up to £2,000 and 2% on balances up to £4,000. You also have to pay two direct debits into your account every month to qualify for this rate of interest.
Nationwide’s Flex Direct account pays 5% interest on balances up to £2,500 if you pay in £1,000 a month.
SAVVY TIP: After 12 months the interest rate falls to 1%.
Santander’s 1-2-3 account pays 3% interest on balances from £3,000 to £20,000 (but it costs £2 a month). This fee is rising to £5 a month from January 11th 2016.
SAVVY TIP: The account will pay 1% on balances up to £1,000, 2% on balances up to £2,000 and 3% on balances from £3,000 to £20,000. It also pays cashback on spending.
Tesco Bank’s current account pays 3% interest on balances up to £3,000. It used to charge a fee of £5 a month (until today – September 17th) unless you paid in £750 a month. But that £5 fee has been scrapped.
TSB’s Classic Plus pays 5% interest on balances up to £2,000.
SAVVY TIP: You have to pay in £500 a month and register for internet banking and paperless statements.
2. Shop around for a savings account
I know this is an obvious tip, but lots of people who have money in savings still don’t do it. It’s not just a case of looking at the account that pays the highest interest rate.
– Look at whether you will get a better rate from a regular savings account. Regular saving accounts often pay much more than ordinary savings accounts. The downside is that there are normally fairly low limits on how much you can pay in each month (typically between £200 and £500).
– Consider whether it is worth putting money into a fixed rate savings account or fixed rate cash ISA. It’s true that fixed rates are very low at the moment and locking into a low rate doesn’t sound like it makes much sense.
SAVVY TIP: If you’re putting money into a fixed rate cash ISA, be aware that you often can’t top it up after a certain period. Some banks will let you take out a second cash ISA in the same tax year (it sounds like it should be against the rules, but it isn’t), but most won’t let you do this. That means you could find you lose a lot of your cash ISA allowance if you can’t pay in the maximum when you open your fixed rate ISA.
3. Consider using a peer-to-peer lender
There are an increasing number of peer-to-peer lenders operating in the market. These companies lend out your money to individuals or businesses. It’s definitely not risk free (see below) and the risks between different sites varies. You must do your research before you lend any money. You can find out more about peer-to-peer lenders in my article called Peer-to-peer lending; what are the risks?.
SAVVY TIP: Your money is not protected by the Financial Services Compensation Scheme (which protects bank and building society deposits up to £85,000 per bank/per banking group if they share a banking licence). Your return will also be affected by ‘bad debts’, if borrowers can’t pay back what they owe and the tax you pay.
4. Consider investing for income
If you’re the kind of person who doesn’t like taking a risk, making the leap to investing in shares may not be the right move for you. But buying in companies that generate an income may be worth considering if you are comfortable with the risks involved. You can spread your risk by investing in a fund (or several funds) that buys shares in a number of different companies.
SAVVY TIP: The ‘income’ from a company comes by way of a dividend, which is essentially just a share of its profits. Older companies tend to be more likely to pay a dividend, and energy and utility companies (such as oil, gas, water and electricity) have historically paid higher dividends than many others. You can find out more about how dividends work in my article Understanding dividends; how they can provide an income or increase your returns.
5. Are bonds worth looking at?
A bond is an IOU for a loan to a government or company. Bonds are issued at a certain price and they produce an income through the interest payment from the government or company. If you buy a bond it normally runs for a fixed term but you can sell it earlier, although you may get back less than you paid for it.
SAVVY TIP: Bonds are often perceived as low risk but that’s not necessarily the case. Some bonds (such as UK government bonds) are producing a very low level of income, so there may be little advantage in investing in them. I’ve written a guide to the basics of How corporate bonds work and who should invest, which you can read by clicking on the link.
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