This probably won’t come as a surprise to many, but savings accounts are not the best place for your savings.
Interest rates have been depressed for years in a bid to boost the economy, and traditional savings accounts typically offer 0.5-1% APR per year. That doesn’t even beat inflation.
Below, we take a look at alternatives to traditional savings accounts.
- After tax and inflation the average interest paid on quick access savings accounts is around 0.66%
- The average interest on ISAs is 1.44% – Better but still pretty miserable.
- In fact cash ISAs aren’t expected to reach 5% AER for a decade. Compare that with 5.5% back in 2007
Most current accounts offer little or no interest on in credit balances, but those that do are amongst the buys out there.
Nationwide customers can earn 5% on balances up to £2,500 with the FlexDirect account, compared to just 0.5% on their instant access savings account, and 1.5% on a one-year fixed ISA.
First Direct offer 6% AER fixed for a year on their regular saver account. Yes it’s a savings account, but we’ve listed it here as it’s linked to the First Direct 1st Account.
The current account has a £10 monthly fee that’s waived if you pay in at least £1000 per month. There’s also a £100 switching bonus available if you use their switching service, close your old current account, and pay in £1000 within the first three months.
Like saving accounts current accounts come with a FSCS guarantee, meaning that your money (up to £85,000) is safe should anything happen to the bank. Unlike savings accounts though, these headline interest rates typically last only one year. After that they revert to a more paltry figure, so it would pay to switch once the promotion ends.
Stocks and shares
Some may consider stocks and shares to be beyond their reach, or too risky as an investment, and while it’s true that individual stocks can be volatile, funds are a whole different matter.
Equity income funds tend to invest in large, profitable organisations, and spread their risk by investing across a range of sectors. Monthly dividends are paid on profits and yields averaging around 3-4 per cent are common. What’s more, if the investment is carried out via a stocks and shares ISA there’s no tax to pay.
Typically experts recommend savers to hold some fixed interest investments too. M&G Optimal Income (another wealth 150 fund), is a popular choice in this area. The fund invests in the bond market, which over the past few years has performed exceptionally well compared to other forms of investment. The vast majority of the fund’s investment is in lower risk government bonds, and it makes a point to prioritise capital returns over income. The current yield is around 2.6%, which still beats many savings accounts.
It’s important to point out that unlike cash deposits, money invested in stocks and shares is not protected. Markets can crash, and fund managers can make mistakes, hence it’s important to keep a balanced portfolio and spread the risk across a variety of investments.
Although still in it’s infancy social lending is steadily growing in popularity, and can be an attractive alternative or compliment to traditional savings.
Probably the most the famous of the peer-to-peer lending sites Zopa provides an online platform for you to become the bank manager by lending your own money to borrowers.
Interest levels depend on how much risk you’re willing to take, and how long you lend for. Typical returns are 4.4% for money invested over a five-year period.
For larger amounts (Zopa recommends at least £2,000) the money is split, and lend to multiple borrowers to minimise risk.
The company also holds separate safety funds to help safeguard against bad debt, but should the worst happen, deposits are not covered by the Financial Services Compensation Scheme. That being said, loans would still stand and the administrator would have to put into place a mechanism to collect repayments and return them.
Ratesetter is another service similar Zopa, and also offers ‘safety funds’ to protect your money, but borrowers include businesses, as well as individuals.
It estimates a maximum pre-tax return of 6% for investments over five years.
Invest in private business
It’s important to note that investments of this nature carry risks to your capital, but also offer potential rewards.
Seedr allows you to buy equity in a companies seeking investment, with no guarantee of returns, however many of the companies seeking investment are well-established businesses, such as online account platform FreeAgent. Most investments here will be in anticipation of capital growth, so it’s vital that thorough research is carried out before parting with your money.
Crowdcube, is a similar service, but also offers mini-bonds. These provide a regular return by lending money to established brands over a set period. These bonds can yield pre-tax returns of up to 8%. Of course there is also the option to buy equity in a number of companies too.