We are not talking about serious longer term investments here. This is money which is meant to be safe and accessible, and preferably tax efficient. It could well be that it’s money earmarked for your tax bill, for example.
So, the natural products that come to mind are National Savings (NS&I), as well as all the various banks and building societies deposit accounts. But of course it all depends on what the rates are, and indeed would it not be better to pay off debt if your lender allows you to?
We disregard Cash ISAs here as the amounts you can put away each year are very modest at £3,600 (rising to £5,100 pa from April 2010). However, if these amounts are in the range of what you need, it would certainly pay to look at these first, as they are tax free. But if you have, say, £10,000 – £100,000 to ‘park’, what is the latest state of play?
Well, lets look at National Savings. We have ignored Premium Bonds, as the prize fund pays the equivalent of 1%, and perhaps could now be looked at in the same way as the lottery. Of course, there is the chance to win big with a £1m jackpot, as well as many smaller amounts each month.
Please note that all the following rates are quoted gross, and if you are a higher rate tax payer you will be hit hard with 20% at source tax to pay and a further 20% on your tax return. If you are a basic rate payer then the 20% at source only applies. If you are a non tax payer then complete form R85 to receive any interest gross #.
The NS&I easy access account currently pays a very low 0.3% to 0.7%. Compare this to the rates mentioned below.
Other options, which are tax free, are fixed interest savings certificates paying 1.25% TO 2.25% over 2 or 5 years. The index linked certificates are only paying 1% above inflation, and since this is minus at present you simply receive 1%. Of course, if you think that inflation will rise sharply, you could consider this option.
There was a huge amount of funds invested with NS&I whilst the stability with the banks was a huge issue, and many people fled to safety. However, with things settling down somewhat, it seems that because the rates on offer from NS&I are poor the same people are now leaving.
So, where are they going with their money?
Well, savings rates with banks and building societies have risen. For example, on easy access accounts, ING offers 3.2%, and ICICI Bank UK has a fixed rate for 3 years at 4.6%. On shorter terms, the Post Office has a rate on a 1 year bond of 3.85%.
It really does come down to your opinion on how interest rates will be in the next few months through to, say, 3 years. Your guess is probably as good as ours!
For those of you with flexible mortgages where you can pay off debt, or park money in the current or deposit accounts, this should be your first port of call. If the rate you are paying is 3%, then this is equivalent to 5% for a higher rate tax payer.
If you are lucky enough to have a tracker that is as low as 1.5%, then the equivalent savings rate would be 2.5%. So, technically, it may well be that you are better off placing your money elsewhere, although you need to take into account the ‘hassle factor’ of moving money around on a regular basis.
As ever, whichever route you take, be careful to ensure that if these monies need to be accessible, that the account chosen allows you to do this. In addition, the government guarantee the first £50,000 of money per individual per institution, so be sensible here.
# Form R85
Key Considerations
Having written this article, the rates mentioned will be out of date pretty soon, so make sure that you keep up to date and move your money if it pays to do so.
Action Point
Work out what you typically save (and how often) to come up with a strategy for your savings.
If you have money invested in a deposit account, check what rate you are getting and compare it against what’s available in the market.
If it pays to move your money – take action!
About Graeme Urwin
