1. Use your ISA allowance
Interest rates paid on the full £5,340 balance in a Cash ISA range from 0.10 per cent to 4.50 per cent, with an average rate of 2.54 per cent gross AER.
According to David Black, Defaqto's insight analyst for banking, the highest-paying easy-access cash ISAs for a £5,340 balance are currently:
- AA's Internet Access ISA issue 2 which pays 3.05 per cent gross AER for £500+
- ING Direct Cash ISA paying 3.00 per cent for £1
- Market Harborough Brighter ISA issue 9 paying 3.00 per cent for £5,340
2. Don't just stay with the same account
"Shop around for the best deal and review your account regularly. On a £1,000 balance the average instant/easy access account pays an interest rate of 1.23 per cent gross AER, but 94 accounts pay 0.10 per cent or less," Black continued.
However, there are accounts that pay significantly higher interest than this. The accounts that permit three or more withdrawals per year without penalty currently offering the highest interest rates are:
- Coventry Building Society's Poppy Online Saver issue 2 paying 3.15 per cent, including an introductory bonus, for £1+ but it limits withdrawals to four per year
- Santander's eSaver issue 4 paying 3.10 per cent (including an introductory bonus) for £1+
- Manchester Building Society's Premier Instant issue 13 paying 3.06 per cent for £1,000+, but it limits withdrawals to three per year
3. Take advantage of introductory bonuses
The average rate paid by instant/easy access accounts that have an introductory bonus is 2.16 per cent; 91 per cent higher than the average rate paid by instant/easy access accounts that don't have an introductory bonus.
The accounts currently offering the most generous initial rates including an introductory bonus and permitting three or more withdrawals per year without penalty are the Coventry Building Society's Poppy Online Saver issue 2 and Santander's eSaver issue 4 accounts, mentioned above.
4. Consider fixing your savings
Fixed-rate bonds currently pay higher rates than variable-rate accounts but don't benefit from any increase in general interest rates during the fixed-rate term. For a £10,000 balance the rates paid by fixed-rate bonds range from less than 1 per cent to 4.70 per cent, with an average rate paid of 3.06 per cent.
The highest rate fixed-rate bonds currently available for a balance of £10,000 or less for different fixed-rate periods are:
- Kent Reliance's 5 Year Fixed pays 4.70% for £1,000+
- Halifax's Fixed Online Saver 4 Year pays 4.30% for £500+
- Yorkshire Bank's 3 Year Term Deposit pays 4.30% for £2,000+
- Yorkshire Bank's 2 Year Term Deposit pays 4.00% for £2,000+
- AA's 1 Year Fixed Rate Bond pays 3.60% for £1+
5. Inflation-proof your savings
Inflation has been significantly higher than the bank base rate for quite a while but there are a number of bonds available that track the retail prices index. This can be held in an ISA wrapper, but bear in mind that most economists are expecting inflation to fall in the short-term.
Inflation-linked bonds are currently offered by a number of institutions, including Barnsley Building Society, BM Savings, Chelsea Building Society, Legal & General, Santander, Tesco Bank and Yorkshire Building Society.
6. Consider an offset mortgage
If you have a reasonable level of savings and a mortgage then it might be worth considering an offset mortgage. With an offset mortgage you effectively earn tax-free interest on your savings at the same rate as you pay on the mortgage. However, you don't actually receive the savings interest because it is offset against the interest that you pay on the mortgage.
Offset mortgages can be especially advantageous for higher-rate taxpayers.
7. Check out current accounts that pay favourable rates on credit balances
If you’ve got at least £1,000 a month to splash and are willing to switch your current account then look at current accounts that reward people for maintaining a certain level of money in their account. The accounts currently offering the most generous deals are:
- Halifax's Reward Current Account will pay you £5 net of basic rate tax every month
- Santander's Preferred Current Account pays 5 per cent gross AER fixed for one year on credit balances up to £2,500
8. Pay off expensive debt
If you have outstanding debts then use some of your savings to pay them off. The interest rates that are charged on store cards, credit cards, unsecured loans and overdrafts will generally be very much higher than you can earn on your savings account.
As shown above, the highest-paying fixed rate bond pays 4.70 per cent whereas the average rate charged by a credit card is 18.8 per cent APR.
9. Use your personal allowance
Everyone gets an annual personal allowance which means that you can earn a certain amount without paying any income tax. The basic personal allowance is currently £7,475, whereas those aged 65 to 74 have an allowance of £9,940 and it is £10,090 for those aged 75 or over.
If you're a non-taxpayer then make sure that you fill in the R85 form, which your bank or building society can provide, to enable you to receive gross interest.
10. Watch out for withdrawal restrictions
It is becoming increasingly common to find accounts that limit the number of withdrawals that are permitted – 18 per cent of instant/easy access accounts do this and with 2 per cent of accounts you will lose either a bonus or some interest if you make a withdrawal.
Make sure that you're aware of, and happy with, any restrictive terms and conditions before you open an account.