Make your savings work harder

Find out how to get the best returns from your savings and maximise the interest from your hard-earned capital.

Key points

  • Consider the full range of options including Isas, current accounts, peer-to-peer, regular savers, notice accounts, stocks and shares and other investments
  • Check interest rates regularly to make sure yours hasn’t dropped
  • Use your tax-free savings allowance to best effect
  • Try to re-invest your returns to make the most of compound interest

Whatever your money habits, you'll want to make sure your savings account is making the most of your capital and is right for your needs.

Rates change, bonus periods end and the world keeps turning, meaning you should regularly review your finances to make sure you haven't slipped behind the financial times.

Get the maximum return on your savings

If you're keeping your money in savings it's all about being vigilant and searching out the best rates for your situation...

Use your tax-free savings allowance

Since April 2016 basic rate taxpayers have got the first £1,000 of their savings interest free of tax, and higher-rate taxpayers the first £500.

The government has estimated that this change will mean 95% of the UK population will be relieved of having to pay any tax on their savings interest.

With a longer-term view in mind, it's also worth trying to use your maximum tax-free allowance every year from Individual Savings Accounts (Isas).A piggy bank wearing a pair of sunglasses

Many people are put off using Isas because they think they might be complicated, but you only really need to get your head round the fact that you get a defined tax-free Isa allowance every tax year - read more in our beginners' guide to Isas.

Aside from this, Isas work pretty much like other savings and investments, with the same types of savings account to choose from, from fixed rate to easy access - you just won't be paying any tax on the interest you earn.

Compound your gains

Compound interest simply means when interest is paid on interest, but you shouldn't under-estimate the enormous potential it offers for long-term gains on savings and investments.

Did you know...?

  • Paying away interest rather than compounding it could cost you thousands over the long term

For example, if you have £1,000 in a savings account earning 5% AER where the interest is paid to you each year, you’ll have £1,050 at the end of the year.

If you keep that interest in the account, the following year you'll be making interest on £1,050, and if this pattern of compounding investment was to continue for 30 years you'd have made £3,467.74 in interest, making your total with the capital £4,467.74.

If, however, you chose to take out that initial £50 interest at the end of the first year and you did the same for each of the subsequent 30 years you'd have taken out £1,500 and would still have your initial £1,000, giving you a total of just £2,500.

Offset savings against debt

Interest on debt is almost always higher than that on savings, so your first steps are to pay down any short-term debt and ensure you have enough rainy-day savings in case of an emergency.

Longer-term debt needs more thought, especially as the major source of this is often a mortgage.

Offset mortgages remain something of a niche product, but if they suit your style of money management the potential benefits they offer can be huge.

Rather than paying interest on your savings, an offset mortgage will instead reduce the amount of interest you have to pay on your mortgage balance.

This can be a flexible and tax efficient option, although deposits, interest rates and fees tend to be higher than with other mortgages.Cutting the cost of loans

Consider fixed-rate bonds

As a general rule, the more restrictions a savings account comes with, the more interest it offers.

That's why it may be worth considering a fixed-rate bond. These offer a set rate of interest, but only if you don't need to access your money for a certain period of time - typically from six months up to five years.

Fixed-rate bonds may be suitable for those with a lump sum to invest, with a typical minimum of between £1,000 and £2,000 to open the account.

Make sure you keep some money in an accessible rainy-day fund, as if you need to withdraw any funds from a fixed-rate bond you could find yourself penalised with hefty charges (if you're allowed to withdraw it at all).

Make sure you keep an eye on the rate of your fixed bond and be ready to compare and switch once it's expired.

Be prepared to give notice

Banks can offer better rates on savings if they know your money will be staying with them, so notice accounts that ask you to give them plenty of warning before making a withdrawal often offer more competitive rates.

Did you know…?

  • According to the FCA, 69% of people surveyed in 2015 didn’t know or couldn’t estimate how much interest they had earned on their savings account

As with fixed-rate bonds, ensure you already have an emergency fund to hand as you're likely to be penalised if you take money out early.

Also remember that just because you have to give notice rates aren't necessarily fixed, so make sure you check regularly and switch away if the interest falls.

Look into a regular saver

If you can commit to putting money aside each month, you might get access to some of the better rates on the market.

Regular-saver accounts come with terms and conditions stating you need to deposit money every month, so if you were planning to do this anyway they could be a winner.

Pay attention to terms and conditions, though - there's usually a minimum and maximum amount you can pay in each month and while some will allow you to vary the amount you deposit, others will ask for a set amount each month.

He who understands it, earns it; he who doesn’t, pays it
Albert Einstein on compound interest

If you miss a month or make a withdrawal, you may miss out on interest.

The main downside of a regular saver is that you have to drip-feed your money into it, so you won't be getting the high interest rate on the full amount from the start.

Also, some of the best-paying regular savers may only be available to those who have another product with the provider, such as a current account.

As with other types of savings, remember to check the rate regularly and, if it falls, switch your savings to a more competitive account.

Alternatives to classic savings accounts

Earn more on your current account

The rates offered by high-interest bank accounts can be attractive, possibly outperforming savings accounts - but there are typically limitations attached to them through the terms and conditions.

You'll probably need to pay in a minimum amount every month to qualify for interest, and will typically need to fulfil other criteria such as having a certain number of direct debits set up on the account.Pound coins and a £5 note

There'll probably be a maximum amount of money in the account that'll earn interest and you may be charged a monthly fee.

If you're searching for the best interest rates for large savings, there's nothing to stop you opening multiple current accounts - but remember that you'll have to comply with the terms and conditions of each of them, so the time and trouble taken juggling your accounts could prove onerous.

Also remember that having your money in a current account with capped levels at which interest is paid could prevent you from profiting from compound interest.

Avoid high-interest accounts if you regularly use an overdraft as you may be hit by charges which could wipe out any interest gains.

Have you considered P2P?

  • You'll find peer-to-peer options listed alongside traditional ones when you compare savings through Gocompare.com, so you can easily see how headline interest rates match up

Peer-to-peer lending

Whether it's called social lending, crowdfunding or peer-to-peer lending, such options allow individuals to use their savings to loan money directly to borrowers.

On the surface of it, peer-to-peer lenders often offer some of the best interest rates on the market because they take the middleman - the banks - out of the equation.

What's more, such savings can now be placed within a tax-free wrapper using an Innovative Finance Isa.

You'll find peer-to-peer lending options listed when you compare savings accounts through Gocompare.com, so you can easily see how the headline interest rates compare to more traditional options.

However, returns are not guaranteed and the capital itself can potentially be at risk; the risks can be higher or lower depending on the sort of peer-to-peer investment you choose.

If you want your savings to be absolutely safe you may need to accept a more traditional savings product that guarantees your savings won't be lost.

Sticking with one bank or building society could encourage an element of complacency on the provider’s part
Matt Sanders, Gocompare.com

Since April 2014 the peer-to-peer industry has been regulated by the FCA, but money invested is not protected by the Financial Services Compensation Scheme (FSCS), which can safeguard savings if an authorised firm becomes insolvent or ceases trading.

Crowdlending companies are obliged to protect their investors, though, and many of these firms claim to thoroughly check the people your money is ultimately being loaned to, and they may also have their own compensation schemes in place.

Look into investing

Investing in stock, shares, bonds and funds isn't without its risks, but can also offer higher interest returns than keeping your money in savings.Savings quiz

Trading shares means you'll become a partial owner of a company and the value of your shares will rise and fall as the value of the company does. You may also receive dividends as a shareholder which can be reinvested to buy more shares if you choose.

Many first-time investors will dip their toe in the water with a tracker fund, which passively tracks an index such as the FTSE 100. Such funds can offer comparatively low management fees.

You can also invest in managed funds, which typically contain a mixture of bonds and shares picked by a funds manager, sometimes with a specific theme to all the investments. Fees are typically higher for this than for an index tracker.

Every option will have a varying level of risk associated with it and neither your capital nor your returns will be guaranteed, so you may wish to use an independent financial adviser to help you pick your investments.

Placing your money in a Stocks and Shares Isa means you can use some or all of your annual Isa allowance to exempt your investment from capital gains tax, depending on your circumstances.

Other than this, once you've chosen your Isa platform, you'll have the same investment decisions to make as previously mentioned, along with the associated risks.

For those who aren't averse to risk, alternative investments and commodities could be another area to consider, as could property crowdfunding.

Top tips to maximise savings

Clearer information

  • The FCA plans to make providers include a 'switching box' on account paperwork, outlining the customer's current interest rate and comparing this to the best deals on the market

Know your saving needs

Think carefully about your savings and money needs... How much money will you pay in? When will you need to access the funds?

Getting these crucial things right will help you find the right account and plan appropriately.

Check your interest rates and shop around

According to a 2015 review into cash savings by the Financial Conduct Authority (FCA), many customers don't monitor interest rates on their savings accounts - 69% of those surveyed said they didn't know or couldn't estimate how much interest they had earned on their savings account.

More than half of those surveyed didn't know whether their provider offered a similar account with a different interest rate to their savings account in which they had the highest balance.

"Sticking with one bank or building society could encourage an element of complacency on the provider’s part; they may assume that because you’re still there you’re happy with the service or rate," said Gocompare.com's Matt Sanders.Cash Isas

"The message with all products, financial or otherwise, is to shop around and vote with your feet.”

Avoid zombie savings accounts

If you've invested your savings in an easy-access savings account or a bonus-rate account then it's worth keeping a close eye on your interest rate and making sure your account hasn't joined the walking dead.

'Zombie' accounts are those which may have once offered good interest rates but now pay almost no interest.

Be vigilant with regard to falling interest rates and make sure you keep your money in an account with a competitive AER.

As part of its attempts to reform what it sees as the malfunctioning £700bn savings market, the FCA is looking to improve consumer awareness and boost competition.

Amongst other planned changes it is calling for providers to display interest rates more clearly and to make their notifications of interest rate changes and the ending of fixed-rate periods more accessible.

The FCA plans to implement its reforms by December 2016.

By Emily Bater