Savings rates have been rubbish for a long time now. With the current uncertainty facing the UK due to political turmoil, it’s unlike the Bank of England is going to raise interest rates any time soon.
That’s great news for borrowers – but not for savers! Anyone with some capital to stow away could end up losing money if they stick a lump sum into a savings account that doesn’t keep up with inflation.
Here’s how to find the best savings rates for your money – and some other ideas for ways to beat inflation and grow your wealth despite low interest rates.
- Why inflation affects buying power
- Do inflation-beating savings accounts exist?
- Peer-to-peer lending (or social lending)
- Stocks and shares ISAs
- Corporate bonds
- Children’s savings accounts
The big, fearsome dragon that eats into the value of your savings is inflation. Inflation is a natural part of economics and is when prices go up over time.
It means that the buying power of your money goes down over time. For example, what you could buy for £1 in 2017 cost £1.03 in 2018, according to the Bank of England inflation calculator.
If you look at it the other way, you’ll be able to afford LESS with the same £1 in 2018 compared to 2017, due to the £0.03 difference in your buying power.
However, many savings accounts offered an interest rate below the rate of inflation. So, squirreling cash away in a savings account that offers an interest rate of 2% would mean that, between 2017-2018, you’d have LOST buying power on your savings!
The Bank of England tries to keep inflation below 2% most years. However, there have been some historical spikes – such as an increase of 26.9% in 1975. That’s why you need to find inflation-beating ways to invest your money. Ideally you want at least 6% on your long-term savings and investments – but how is that possible?
In the past, it may have been possible to find savings accounts offering inflation-beating savings. You still can, sometimes – but they often come with a catch.
Fixed savings accounts, for example, offer higher interest rates than easy-access savings accounts. However, if inflation rapidly rises during the fixed term, you could lose the benefits of any higher interest rate. You lock your money into the account for the agreed period – if you take it out before the end of the term, you may face hefty fines. Paying these fines often offsets any benefit of the higher interest rate.
Banks currently offering higher-rate fixed term savings accounts include:
- Hampshire Trust Bank 90-Day Notice Account: 1.4%
- Aldermore 1-year Fixed Rate: 1.5%
- Coventry Building Society Triple Access Saver: 1.46%
- Marcus by Goldman Sachs: 1.45%
Take a look at that list and put it against the current rate of inflation that stands at 1.7%. It’s easy to see that even the fixed-term accounts aren’t offering rates that match the rate of inflation.
Regular savings accounts offer higher rates – but you’re limited on how much you can save each month. These accounts are linked to your current account with the same bank and let you save a set amount each month.
Current examples include:
- First Direct Regular Saver: 2.75% with maximum £300/month deposit
- Santander Regular eSaver: 2.5% with maximum £200/month deposit
- HSBS Regular Saver: 2.75% with maximum £250/month deposit
- Bank of Scotland Monthly Saver: 2% with maximum £250/month deposit
These rates are more favourable – but require a minimum and maximum deposit of between (typically) £25 – £250 a month. This limits how much you can save each year – but it’s worth feeding your money into a regular saver like this if you need a cash buffer that keeps up with inflation.
It’s also worth noting that all of the above interest rates are fixed for 12 months: after that time, you’ll need to check the new rate and may have to shop around to find another. Many regular saver accounts don’t allow withdrawals, either: you can only access your cash by closing the account altogether. If you need easy access to your cash, check this option before opening the account.
If you have a larger amount to save, it’s worth looking at other inflation-beating savings and investment options instead.
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, through a website.
The risks of P2P lending
As with any investment, there are some risks to peer-to-peer lending. The Financial Conduct Authority recently recognised some of the risks to investors and, from 9th December 2019, all firms offering this service must adhere to stricter regulations.
This affects you, too: you’ll only be allowed to invest 10% of your investible assets UNLESS you’ve received independent financial advice about your investment choices. Firms also have to check that you’ve done your research and either received financial advice or can prove you understand what you’re doing with the investment.
If the firm collapses, you might not get your money back – or you’ll receive a smaller amount than you invested.
Unlike bank accounts, the Financial Services Compensation Scheme doesn’t apply to peer-to-peer lending. Your savings are protected up to £85,000 per bank provider – but this doesn’t extend to your peer-to-peer investments.
It’s also typically difficult to withdraw your money early from an investment agreement. If interest rates change, it is even harder to exit early. You’d need to find another investor to ‘buy out’ your loan – but why would they buy your loan at 5% if the current rate for new investors is 8%?
P2P Lenders to try
With all of the above taken into account, peer-to-peer lending is still worth considering if you can afford a little risk with your capital.
Remember: the rates advertised are PROJECTED. They aren’t guaranteed! As with any investment vehicle, your returns aren’t guaranteed.
Take a look at these P2P lenders if you want to take a bit of a risk for inflation-beating savings rewards:
- Zopa is the longest-running P2P lender and offers up to 5.2%
- Ratesetter offers 3 investment options for 3%, 4%, or 5% returns
- Funding Circle lends exclusively to businesses and projects up to 6.5% returns
- Blend Network offers 12% on small property investments – read about Jasmine’s investment here
Innovative Finance ISAs and P2P Lending
Peer-to-peer lending used to be available only outside of ISA wrappers. Now, however, you can choose an Innovative Finance ISA to include your P2P investments. This means you can take advantage of additional tax benefits compared to investing outside of an ISA product.
You should use a stocks and shares ISA as part of your long-term retirement investment plan, anyway. They’re designed to encourage us to save for retirement and offer great long-term investments (especially compared to cash ISAs – more on that here).
Wrapping stock market investments into an ISA product means you’ll benefit from tax advantages. You can also choose your level of risk on your investment – the higher the risk, the higher the potential reward.
It’s also a good idea to invest in several stock market funds – which many ISA providers will do for you through a managed or semi-managed funds. That way, if one stock drops, you might lose money – but if another stock goes up at the same time, this loss could be cancelled out and you could see an overall profit.
For more details about diversifying your portfolio and investing in stocks and shares ISAs, check out our detailed guide here.
Much like the stock market, investing in corporate bonds offers the potential for decent returns. There is, of course, some risk – but if you can afford to take this risk, the rewards can be great.
We’ve got an in-depth guide to investing in corporate bonds here – but here’s the short version:
A corporate bond is like a loan you make to a company. The company pays you an agreed interest rate for a fixed period of time before returning your original investment (in theory – if they fold, you could lose your investment). Like stocks and shares, and P2P lending, corporate bonds aren’t covered by the FSCS £85,000 protection.
Most individuals don’t want to invest in single companies, though, as this increases your risk. Diversifying and investing in a range of corporate bonds helps mitigate some risk. The type of fund you choose is important to your risk management, too – a ‘triple A’ fund tends to lend to established, well-known, global brands.
The best way we like to do this is with corporate bond exchange-traded funds. They’re a cheap way to invest and tend to work well. You can read all about ETFs – including how to invest in them – in our exchange-traded funds guide here.
Children’s Saving Accounts
There is one more way to make the most of your saving potential, if you’ve been hoarding your spare change away to fund your child’s future.
Savings accounts for children are a great way to see large and steady returns on your investment. You can’t take the money for yourself – but if you’ve been saving for their future university fees or wedding fund, it’s a good idea to set up a savings account in your child’s name.
For example, at time of writing, the Halifax Kids’ Monthly Saver offers 4.5% on the first year of the account, moving to a 2% account thereafter. Keeping an eye on the account each year, and transferring to higher-rate accounts where appropriate, means you’ll make the most of great interest rates.
A Junior ISA is another way to save for your child, allowing a tax-free annual saving of £4,368 every year. When they turn 16, they can control their account, and make withdrawals at the age of 18.
You can even set up a pension for your child as soon as they’re born – even small deposits early on will benefit from decades of compound interest for their retirement! As a parent, you can make deposits to their pension and they’ll receive the tax benefits, too.