Finance expert £10,000 savings alert and says you’ll miss out on £300 | Personal Finance | Finance
A savings expert has explained people need to take action and look much further than high street banks like Natwest, Barclays, Nationwide and Santander. In a rundown Matthew Jenkin from Which? consumer group said people fall into ‘traps’ which actually cost them a lot of money.
Mr Jenkin said people who stick £10,000, for example, in a high street instant access account could miss out by hundreds of pounds. He said: “One of the biggest mistakes you can make when looking for the best home for your savings is limiting your search to the high street. The familiarity of a household name may feel safe, but breaking out of your comfort zone and choosing a smaller lesser-known provider could leave you better off.”
He explained that smaller online operators often offered much more attractive rates and said data from Moneyfacts shows the gap in rates is widest on instant-access products. And he said the difference in interest could be more than £300 in a 12-month period for a sum of £10,000.
Mr Jenkin said: For example, if you invested £10,000 in a high street account paying 1.15% AER – the average high street rate – you could expect to earn £115 in interest over a year. But if that balance was invested in the top account for larger deposits you’d earn 4.48% AER and your annual interest income would increase to £448. That’s a difference of more than £300. If you’re nervous about saving with a bank or platform you’ve never heard of, there are some checks you can perform to ensure your money is protected.”
Checking if the bank or platform is covered by the Financial Services Compensation Scheme (FSCS) is vital as it protects up to £120,000 of a saver’s pot if it goes bust. Challenger banks have to abide by the same rules and regulations as other banks, but not all of them are FSCS-protected, he added.
Letting savings sit dormant is another mistake. He said: “Rates can chop and change so fast, it can hard to keep up. But neglecting your savings can cost you. That’s especially true when it comes to deposits in fixed accounts. Unless you tell your bank or building society what to do with the money when the bond matures, your provider may automatically move your cash into a lower-paying or notice account, or return it to your current account where it earns little or no interest.”
He said some headline rates also include temporary bonuses that expire after a few months: “Chase’s Saver, for instance, pays 4.5% AER including a 12-month 2% bonus – but drops to 2.5% afterwards. Make a note of when your term or bonus rate is due to end then switch as soon as possible.”
Mr Jenkin advocated people should consider using a savings platform that allows the person to open and switch between multiple accounts through a single login, without having to fill out a new application each time.
He added: “Some deals available on savings platforms are exclusive, and some platforms will alert you when a better rate becomes available. But watch out for those that charge a fee. This is sometimes taken as a cut of the interest rate before it’s displayed, or deducted as a percentage of your balance.
“People should limit the amounts in easy access accounts, he added, because variable rates can rise and fall quickly: “If you really want to save like a pro, one strategy to try is called ‘split and save’;. This involves keeping some flexible funds in an easy-access account and spreading the rest across several fixed-rate accounts that mature at different times.”
Another option is putting savings into longer-term fixed rates. He said: “Most providers stop at five-year terms, but Moneyfacts data shows a few banks now offer bonds lasting up to seven years. But think carefully before you commit to such a long time. While rates are falling now, a lot can change in just a few years.
“For example, on 1 February 2021, the average one-year fix paid just 0.46% AER and longer-term bonds 0.68%. Those who opened long-term fixed accounts before rates skyrocketed are still stuck with low returns and unable to switch to better deals. The same could happen if you tie in now and rates rise again.”
Finally he cautioned about paying ‘unnecessary tax’. He said: “There is a limit to how much interest you can earn on your money before you face a tax bill. Basic-rate taxpayers can currently earn up to £1,000 in interest tax-free, higher-rate
taxpayers £500, and additional-rate taxpayers get no allowance.
“So if you have a large sum to reinvest, opening a cash ISA can currently help you shield up to £20,000 a year from the claws of HMRC. From 2027, however, the amount you can hold in cash will fall to £12,000 for savers under 65. To use the full £20,000 ISA allowance, the remaining £8,000 would need to be invested in a stocks and shares ISA.”
To read the full advice click here.
