Where should I put my savings?

Where can you get a decent rate of return on your savings right now

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Savings accounts offering decent interest rates

Traditionally current accounts didn't feature anywhere on the list of places for people to keep their savings, but times have changed. Nowadays, they are top of the list for interest rates - but they're not the only option.

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See also: Skipton Building Society to launch cash Lifetime Isa

Banks are no longer jostling to win your savings, so are offering rock bottom savings rates. In the meantime, they know they can make money from you if you have a current account - either by cross-selling other products, or waiting for you to go overdrawn and pay interest. It means they're prepared to offer a decent return on money in your current account.

Current accounts

There are a handful of good offers. The best one for you will depend on the amount of money you reliably have going into the account each month, the amount you want interest on, and the other small print that works for you.

The highest interest rate is in the Nationwide FlexDirect account, which offers 5% AER on balances up to £2,500 as long as you pay in at least £1,000 a month. However, it's worth bearing in mind that this rate includes a bonus of 4% for 12 months - so you will need to switch again after a year.

Alternatively, if you shop at Tesco, and have £3,000 in your current account, there's Tesco, which offers 3% on balances up to £3,000, guaranteed for two years. You need to pay in £750 per month and have three direct debits going out each month in order to qualify, but as an extra bonus you'll get extra Tesco Clubcard points when you shop.

Meanwhile, if you can stick with the small print, the TSB Classic Plus Account could be rewarding. It offers 3% on sums up to £1,500 - as long as you pay in £500 per month, register for internet banking, and paperless statements and correspondence. As a bonus you get 3% cashback on everything you spend until the end of September, £5 cashback as long as you have two direct debits going out each month, plus another £5 if you use your debit card 20 times a month. This offer runs until the end of June 2018.

Finally, if you have a bit more in your account, you could consider the Bank of Scotland Vantage, which you'll need to pay £1,000 a month into and have two direct debits coming out of. In return you'll get three tranches of interest - 1.5% on amounts up to £1,000, 2% on amounts up to £3,000 and 3% on amounts up to £5,000. Another one offering interest on amounts up to £5,000 is Club Lloyds, which offers 2% - as long as you pay in £1,500 a month.


These accounts have a couple of downsides. The first is that those with larger sums of savings won't get interest on all their money. The other is that if you have money in a current account, it's sometimes far too easy to spend it. If you are concerned by either of these things, there are other options.

Other kinds of savings

If you are prepared to jump through hoops and follow complex small print, then by far the best interest rates available are from monthly savings account - into which you contribute each month for a year. There are four offering 5%, and are very handy if you're trying to build up a savings pot.

If you have a Nationwide Flex current account, you can get a Flexclusive Regular Saver account, then there's the First Direct regular saver account, the M&S Bank monthly saver (for M&S current account holders) or the Santander Regular eSaver (Issue 5) (available for specific Santander customers).

Alternatively, if you have a lump sum and need easy access to your money, then you should look at the best possible rates on easy access accounts. These offer lower AERs, but offer more flexibility. The best on the market at the moment is the Charter Savings Bank Easy Access Issue 4 - at 1.11% - which requires a minimum deposit of £1,000; followed by RCI Freedom Savings Account (minimum deposit £100) and Britannia Select Access Saver 7 (minimum deposit £500 and limited to four withdrawals a year) both at 1.1%. The best return on a £1 minimum deposit is from the Tesco internet saver at 1.06%.

It's worth keeping your eye on these rates, however, as they change very regularly, and once they have attracted enough money they are often withdrawn - sometimes in a matter of days after the launch.

If you can tie your money up for longer, you will get a better rate. Right now this looks great, but you will need to decide whether interest rates are likely to rise between now and when the account matures - in which case your rate may look decidedly less attractive. At the moment, the best rate for one year is from Atom Bank at 1.7%. The best for two years is Secure Trust Bank at 1.85%. The best over three years is NS&I at 2.2%, and the best over four years is Vanquis Bank at 2%.


Tax

The vast majority of people will pay no tax on their savings interest at the moment, as you have a £1,000 tax-free allowance on interest from savings each year. If, for example, you were to get 2.5% interest on your savings, you could have £40,000 in savings before you start to pay tax.

However, things may well change. Not every political party may be committed to this allowance in future. Meanwhile, interest rates will rise at some point. To protect your savings from tax, it's worth considering a cash ISA - into which you can save up to £20,000 a year.

The rate you can get on these depends on the small print you can abide by. So for example, the Hinckley and Rugby Building Society has a 120 day notice cash ISA offering 1.2%. If you need limited access at shorter notice, meanwhile, the Virgin Money Defined Access Cash E-ISA Issue 13 pays 1.05%, with up to three withdrawals a year (additional withdrawals will affect your interest rate).

For easier access, both the Post Office Online ISA Easy Access Issue 10 and the AA Cash ISA Easy Access Issue 11 offer 1.01%, although the Post Office rate includes a bonus of 0.76% for the first 12 months and the AA includes a 0.81% bonus for the same period - so you will need to reassess both after the first year.

Again, you can get an ISA paying a higher rate if you are prepared to tie your money up for longer - including 1.13% from Cyprus Bank for a year, and three deals from Paragon Bank - offering 1.26% over two years, 1.41% over three years and 1.8% over five years.

If you are saving specifically for a deposit for a house - and you are under the age of 40 - it's well worth considering a Lifetime ISA. The first on the market is from the Skipton Building Society - launched at the start of June. It only offers 0.5% interest, but when you add the government's 25% annual saving bonus, it's a clear winner.

Is cash right for you?

There are plenty of options, and in some cases, they allow you to earn as much as 5% on at least some of your savings. However, it's easy to see why people are disillusioned with returns of less than 2% - which effectively mean losing money after inflation.

For certain savers, who are saving for the short term, and cannot afford to lose any of their money through volatility, this will still be their best bet. However, for those with a higher risk tolerance, and a longer time frame, it's these kinds of figures which mean that before trying to decide which account you put your savings in, you should think long and hard about whether any of it should be in any other kind of investment instead.



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