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Where to earn most interest on your money
With savings rates set to remain low, this is how to get the best return
Looking for the best return on your cash, but don't want too much risk?
Sadly, savings interest rates still remain low, thanks mainly to a combination of a low Bank of England base rate and cheap money available to banks and building societies via the Funding for Lending scheme.
While the Funding for Lending scheme money might be winding down, the Bank of England has indicated that interest rates are likely to stay low for some time. In addition, when they do rise, they are likely to rise slowly. So, if you prefer to have your savings in cash, now might be the time to look at getting a better rate by locking your money away for the short term.
It's also well worth looking beyond high street savings accounts to the likes of current accounts and peer-to-peer websites.
Let's look at all of these and more to see what rates are on offer.
[The great news if you have unpaid credit cards]
Instant access savings accounts
No instant access account comes close to beating inflation, currently 2%, and indeed rates on this type of account continue to drop.
Currently the best you can get on your cash is 1.50% from Britannia's Select Access Saver, although there is a catch in that you're limited to four withdrawals a year. You can open it with £500. For truly unlimited withdrawals, you're looking at 1.45% from Kent Reliance Building Society on £1,000 or more.
Cash ISAs
With savings account rates continuing to fall, if you haven't used your tax-free Cash ISA allowance, this arguably should be the first place you turn.
If you want instant access, perhaps for an emergency fund, then Stafford Railway Building Society and Britannia (limit of two withdrawals per year) are paying the top rate of 1.75%.
If you can cope with giving 120 days’ notice to get your cash, then you can get 1.81% from the Islamic Bank of Britain. Note again that this is a Sharia-compliant account so the rate is an anticipated profit rate rather than an interest rate.
Moving onto fixed rates, and there's 1.85% on offer from Britannia if you lock your money away for a year, but you need to invest your entire allowance of £5,760 in one go. Over the best part of 18 months (until the end of May) you can earn 2% from either Chelsea or Yorkshire Building Societies on £100+. And you can get 2.10% from National Counties Building Society on a two-year fixed rate with at least £1,000.
Virgin Money has the three-year top spot with a rate of 2.40%, and you only need £1 to open it. You can get a three-and-a-half-year rate of 2.75% from Coventry Building Society so long as you put your entire year’s allowance of £5,760 in it.
Leeds Building Society has a five-year fixed ISA paying 3.05% on balances of £1 or more.
Notice savings accounts
By giving up access to your cash for 120 days you can get a rate of 1.81% from the Islamic Bank of Britain. You can open the account with £250. This is a Sharia-compliant account and so, in line with Sharia law, it pays an anticipated profit rate rather than an interest rate.
Fixed rate savings accounts
If you can afford to lock your cash up for a year, the best rate on offer is 1.90% from the Islamic Bank of Britain with a minimum deposit of £1,000. As it's another Sharia-compliant account, the rate is an anticipated profit rate.
Over 18 months there’s a tiny improvement on the rate – you can earn 2.05%, from Nottingham Building Society's eSaver, with £1,000 or more.
For a two-year fixed rate, if you have £25,000 or more, you can earn 2.50% from the Bank of London and the Middle East via its Sharia-compliant account. ICICI Bank is paying 2.40% on smaller balances of £1,000 or more.
Over a three-year term you can earn 2.70% with £1,000 or more, also courtesy of ICICI Bank.
Over four years you can get 2.81% from Vanquis Bank, with a minimum deposit of £1,000, while over five years you can earn 3.25% from FirstSave, providing you have at least £1,000.
If you’re happy to lock your cash up for even longer then Secure Trust Bank (minimum deposit of £1,000) offers 3.52% but you'll need to wave goodbye to your cash for seven years!
Current accounts
A current account continues to trump all the top savings accounts at the moment, for smaller balances anyway. Nationwide’s FlexDirect account pays 5% interest on balances up to £2,500 for the first 12 months. The only condition is you need to pay in at least £1,000 a month.
Meanwhile, Clydesdale Bank and Yorkshire Bank both offer the Current Account Direct, which pays 4% on balances up to £3,000 until the end of March 2015. Again, you need to deposit a minimum of £1,000 a month into the account.
If you don't want to move your money around, Santander’s 123 account pays 1% on balances over £1,000, 2% on balances over £2,000 and 3% on balances from £3,000 to £20,000. You need to pay in £500 a month, and set up at least two Direct Debits. There's also a £2 a month fee on the account but you can earn cashback on some of your direct debits for household bills.
And Bank of Scotland's Classic Account with Vantage, Lloyds Bank's Classic Account with Vantage and TSB's Classic Account with Enhance both pay 3% on balances of between £3,000 and £5,000 so long as you pay in £1,000 a month. You can have up to three of each account too.
[Nationwide and Co-op offer customers free cash - what's the catch?]
Peer-to-peer savings
Peer-to-peer websites allow you to lend money to other people and potentially earn a greater reward for your risk.
However, your interest isn’t tax free and your money isn’t protected by the Financial Services Compensation Scheme, which is where the risk comes in.
RateSetter’s five-year income account offers a rate of 5.60% over five years, with new entrant Lending Works offering 5.40% over the same time period. Meanwhile, Zopa is currently guaranteeing a rate of 4.90% over five years after fees.
You could also look at the likes of: Funding Circle, which only lends to businesses; short-term pan-European lender TrustBuddy; commercial property lender Relendex; and Wellesley & Co, which offers bridging and development loans secured on property.
How they compare
So let's take a look at how the different options really stack up against one another.
Account | Type | Gross interest rate | Net interest rate for basic rate taxpayer | Net interest rate for higher rate taxpayer | Minimum deposit |
Five-year peer-to-peer savings | 5.60% | 4.32% | 3.24% | £20 | |
Lending Works Five Year* | Five-year peer-to-peer savings | 5.40% | 4.32% | 3.24% | £10 |
Current account | 5.00% (one year only) | 4.00% | 3.00% | £1 | |
Five-year peer-to-peer savings | 4.90% (guaranteed rate) | 3.92% | 2.94% | £10 | |
Clydesdale Bank Current Account Direct | Current account | 4.00% (until March 2015) | 3.20% | 2.40% | £1 |
Yorkshire Bank Current Account Direct | Current account | 4.00% (until March 2015) | 3.20% | 2.40% | £1 |
Secure Trust Bank Fixed Rate Bond | Seven-year fixed rate bond | 3.52% | 2.82% | 2.11% | £1,000 |
FirstSave Five-Year Bond | Five-year fixed rate bond | 3.25% | 2.60% | 1.95% | £1,000 |
Leeds BS Fixed Rate ISA | Five-year fixed rate Cash ISA | 3.05% | 3.05% | 3.05% | £1 |
Current account | 3.00% | 2.40% | 1.80% | £3,000 | |
Bank of Scotland Classic Account with Vantage | Current account | 3.00% | 2.40% | 1.80% | £3,000 |
Lloyds Bank Classic Account with Vantage | Current account | 3.00% | 2.40% | 1.80% | £3,000 |
TSB Classic Account with Enhance | Current account | 3.00% | 2.40% | 1.80% | £3,000 |
Four-year fixed rate bond | 2.91% | 2.33% | 1.75% | £1,000 | |
Coventry BS Fixed Rate ISA | Three-and-a-half-year fixed rate Cash ISA | 2.75% | 2.75% | 2.75% | £5,760 |
ICICI HiSAVE Fixed Rate Account | Three-year fixed rate bond | 2.70% | 2.16% | 1.62% | £1,000 |
Bank of London and the Middle East Sharia-Compliant Premier Deposit Account** | Two-year fixed rate bond | 2.50% | 2.00% | 1.50% | £25,000 |
Virgin Money Fixed Rate Cash E-ISA | Three-year fixed rate Cash ISA | 2.40% | 2.40% | 2.40% | £1 |
National Counties Fixed Rate Cash ISA | Two-year fixed rate Cash ISA | 2.10% | 2.10% | 2.10% | £1,000 |
Nottingham BS eSaver Fixed | 18-month fixed rate bond | 2.05% | 1.64% | 1.23% | £1,000 |
Chelsea BS/Yorkshire BS Fixed Rate e-ISA | 18-month fixed rate ISAs | 2.00% | 2.00% | 2.00% | £100 |
Islamic Bank of Britain Sharia-Compliant Fixed Term Deposit** | One-year fixed rate bond | 1.90% | 1.52% | 1.14% | £1,000 |
Britannia Fixed Rate Cash ISA | One-year fixed rate Cash ISA | 1.85% | 1.85% | 1.85% | £5,760 |
Islamic Bank of Britain Sharia-Compliant 120-Day Notice ISA** | Notice ISA | 1.81% | 1.81% | 1.81% | £250 |
Islamic Bank of Britain Sharia-Compliant 120-Day Notice Account** | Notice savings account | 1.81% | 1.45% | 1.09% | £250 |
Stafford Railway Building Society/Britannia Select Access*** | Instant access ISA | 1.75% | 1.75% | 1.75% | £1/£500 |
Britannia Select Access Saver*** | Instant access savings account | 1.50% | 1.20% | 0.90% | £500 |
*Not protected by the Financial Services Compensation Scheme
**Anticipated profit rate
***Withdrawal limits apply
The account you go for will probably be determined by the amount you have to save, your attitude to risk and whether you want instant access to your money.
What's clear though is that if you want a better return on your money in the longer term, with a bit more risk in some cases, you're better off looking beyond traditional savings accounts right now.
Unfortunately, if you just want somewhere to put some money away in case of a rainy day, you're not going to be able to beat inflation unless you go for peer-to-peer savings. If you don't fancy that, you should still shop around for the best rate you can get.
