Savings rates are rubbish right now. The Bank of England is likely to keep rates low for another few months at least as the economy struggles. While that’s great for borrowers, how do you beat the current dismal savings rates if you have savings? Here are our ideas for finding the best savings rates for your money.
- Inflation-beating savings accounts
- Peer-to-peer lending (or social lending)
- Stocks and shares ISAs
- Corporate bonds
The big, fearsome dragon that eats into the value of your savings is inflation. Inflation (basically prices going up) means that however much money you have saved, over time the buying power of that money (what you can actually get for your cash) goes down. So to keep the value of your money in the long-term you need to be getting an interest rate on it that’s much better than inflation.
The government is trying (and currently failing) to keep inflation below 2% but in the past it has gone well into double figures. In 1975, for example, it went up to 26.9%! This just shows how important it is to get at least 6% on your long-term investments if you possibly can. It’s even important for short-term savings (that’s five years or less).
Imagine lending your neighbour some money and being able to agree between you what interest rate you will charge. You’re likely to end up with a better rate than you would get on your savings in a bank and they would be likely to get a cheaper loan than a bank would give them.
That’s what peer-to-peer lending is, except you do it a bit more formally, though a website.
Right now there are a few social lending sites that we like and we are putting our money into them because they give much better rates than the banks and building societies. Here are the ones you can choose from:
- Zopa says their lenders currently make an average of 8.2% a year on their savings. It’s easy to lend your money out as you can see on our Zopa lending article here.
- Yes-secure is a very similar site to Zopa. Find out about how to get around 9% on your savings with them here.
- Funding Circle is very interesting because it lends your money to small businesses rather than individuals, so by saving with them you’re potentially helping the economy too! Small businesses are being held back right now by the banks refusing to lend money to them at a decent rate. Funding Circle is helping to keep the wheels of commerce turning by offering more affordable rates and terms.
The one big disadvantage of peer-to-peer lending is that currently you can’t wrap your investments in an ISA. This may change in the future but currently you have to pay the full 20% tax on any interest you get.
If you’re planning on saving for the long-term…i.e. investing then you should be putting at least some of your money in stocks and shares ISAs anyway. The point of ISAs really is to encourage us to save for our retirements so we should be looking at them as long-term investments. This is why the government lets us put the full ISA allowance into stocks and shares while we only get half that amount to put in cash ISAs.
Right now, it makes even more sense given that most cash ISA rates are so pathetic. It’s certainly what I have always done with my ISA allowance and I recommend it to others.
There are a lot of different stock market funds you could invest in and wrap them in an ISA. I like the cheap, simple tracker funds that are available from a few investment houses. You can find out which tracker fund ISAs we like here.
For the long-term and for rate-beating investing it’s certainly best to go for stocks and shares – ideally index-tracking funds – rather than let your money languish in ‘cash’ accounts (i.e. savings accounts wrapped in an ISA).
As we explain in this article on investing in corporate bonds, you can make decent, regular money from corporate bond funds.
Corporate bonds are basically loans you make to big companies. They ask us to lend them money for a fixed period of time and in return they promise to pay us a fixed rate of interest for that time (hence the ‘bond’ bit!)
On the whole, individuals like you and me don’t lend directly to a single company. We tend to put our money into funds that lend to a group of big companies. It’s easier and, because the loans are made to several companies at once, it spreads the risk. If one or two of them default on the loan you’ve still got the others to keep the rate up.
Over time, the money you make on these funds tends to be less than you would make with stocks and shares but more (currently a lot more) than you would get from savings accounts.
As you can see from our article, we like to invest in corporate bond exchange-traded funds because they’re cheap and they tend to work well. You need to buy them through an online broker such as TD Direct Investing. Also, an important thing to note is that, as with stocks and shares investments, corporate bond investments are not covered by the Financial Services Compensation Scheme (FSCS) so if the fund tanks, you will lose your money.
We think it’s worth the risk, though, particularly if you go for what are called AAA (or ‘triple A’) funds – those are funds that only lend to really big, well-established, global companies like Shell, BT, GlaxoSmithKlein etc.
Also, Tesco bank has now waded into the corporate bond market with what they call a ‘retail bond’ giving 5.2% (called Tesco Personal Finance Plc 5.2% Sterling 2018).
This is actually a direct loan to Tesco bank itself, unlike bond funds. Tesco wants to raise extra money to open up in-store banks and start a range of mortgages. In theory, lending directly to Tesco bank is more risky than putting money in a corporate bond fund, but as it is owned by Tesco, Britain’s biggest retailer, it is a much safer bet than most loans.
The bond matures in August 2018 which means the investment term is 71/2 years – and pays 5.2% gross each year. The minimum investment is £2,000 and you can put it into a stocks and shares ISA or SiPP (Self-invested Personal Pension). If you’re interested in investing you’ll need to request it through the broker.
To compare different saving options see our comparison tool here