Martin Lewis: How to maximise every penny of your savings
A month ago the Bank of England increased interest rates for the first time in a decade. And now on the back of it savings rates are on the up. Yet before you whoop and cheer, they’re still pretty dismal. So our Money Saving Expert Martin Lewis is here with his masterclass to show you how to maximise every penny.
Below is a brief synopsis of how to save and the current deals, for full regularly updated help see Martin’s full ‘Savings Best Buys guide’.
Pay off debts before saving
If you’ve got expensive debt, you shouldn’t be saving. A £1,000 credit card debt at 18% costs £180/year, while the same amount saved in top paying savings account only earns you just over £10. So pay the debt off with your savings and you're £170/year better off.
If you’re thinking, but I need savings for an emergency, well if the worst happened you’d be able to use the credit cards, and be in no worse a position, but would’ve saved meanwhile.
The same applies to a mortgage. If it’s interest rate is higher than you can earn by saving, then provided there are no penalties for doing so, overpaying is mathematically the best thing to do. Yet as you usually can’t ‘borrow back’ on a mortgage, always keep a cash emergency fund in savings of three to six months worth of bills first.
The top paying savings options
Where to save depends on you and often mixing and matching is the right move All the accounts listed below have the full £85,000 UK savings safety protection, per person, so in the unlikely event the Bank went bust, you’d be protected.
The golden rule is if your savings pay under 1% you’re really underperforming – so check now. Let me run through this simplest first.
- Save at 1.45% in a bog standard simple easy-access account. With these accounts you can save as much as you like (within reason), add to it whenever you want, and get your money out whenever you want. So you have total freedom of access.
The top payer is now 1.45% from Lloyds-owned Birmingham Midshires – this is a variable rate, which means it can move (ie, drop) so keep your eye on it, and if it drops move it elsewhere. Worth noting Tesco launched a 1.35% account last week, but it was so oversubscribed, they stopped it for new customers before it started.
- Earn 1.95% if you’re prepared to lock cash away. If you’ve some of your savings that you don’t need access to, then put it in a fixed account to earn more. Yet you won’t be able to touch your money during the time. The best one-year fixis from then app-only Atom Bank pays 1.95% (min £50) fixed for a year, while Charter Savings pays 1.81% fixed (min £1k)
Yet there are sharia compliant fixed savings accounts that beat these. They pay out an ‘expected profit’ rather than a set amount of interest (as Islam bars interest). Generally this has always been paid, but by definition it isn’t guaranteed. The BLME (Bank of London and the Middle East)gives a 2% 'expected profit rate' (min £25k) after one year, 2.1% after two years and 2.5% after five years. It has the full UK £85,000 savings safety protection.
- Never owned a house, but want to one day - a help to buy ISA or Lifetime ISA is a no-brainer. First time buyers saving in one of these two special ISA accounts get a 25% bonus added on what you’ve saved to use towards your first house. So if you’ve £10,000 you get £12,500.
Which to go for is complex. Help to Buy ISAs win if you’re buying within a year, are under 18 or over 40 (as you can’t have a LISA then), or if you’re not sure you’ll buy a house (as you can withdraw money with no penalty). If not LISAs usually win, as you can put more in therefore the bonus is bigger. Do more reading online though its complex.
- Saving regularly earn up to 5%. If you put money aside each month, then on that you can earn higher interest with a regular savings account. The top payers are only for those with certain bank accounts, so if you bank with First Direct, M&S, Nationwide, Santander 123, or HSBC Advance, check if you can get one paying 5%. Yet you can usually only put in around £250 to £300 a month for a year.
- Switch bank to earn up to 5%. These are bank current accounts not savings, but you don’t have to switch to them to do it (you can keep your current bank account if you want) though you will have to meet their terms, which usually involves paying in a set amount each month and having direct debits set up.
They work like easy-access savings accounts though. Nationwide FlexDirect pays 5% AER on up to £2,500 for the first year (it drops to 1% after) and Tesco bank pays 3% guaranteed until April 2019, on up to £3,000.
Of course if you’re a couple you can double this by opening more than one, and some of these banks allow you to open two accounts per person.
Why no mention of cash ISAs?
While these are tax-free, these days you’re allowed to earn £1,000 of INTEREST a year on all savings without paying tax on it (£500 for higher rate taxpayers). So the vast majority of people no longer pay tax on savings, and as Shawbrook Bank best paying cash ISA pays just 1.1%, unless you’ve a shed load of savings, stick with the normal savings accounts as the interest is higher.