COMMENT
Five Steps To Smarter Saving!

By Cliff D'Arcy
October 6, 2005

If I had to come up with a golden rule for savers, it would probably be: "earn as much interest as you can, while keeping your money absolutely safe".

The good news is that all UK-authorised banks are covered by a safety net known as the Financial Services Compensation Scheme (FSCS). If an authorised bank fails, the FSCS will refund all of the first £2,000 lost, plus nine-tenths (90%) of the next £33,000. So, the maximum compensation per saver is £31,700. Thus, subject to the above limits, depositors in UK-authorised banks enjoy a high degree of protection. Now let's look at ways to boost your savings interest:

1. Avoid paying tax

Basic-rate taxpayers who earn £150 of gross (pre-tax) interest have to pay a fifth of this sum, £30, to the taxman, leaving them with £120. Higher-rate taxpayers lose twice as much to HM Revenue & Customs, leaving them with a mere £90.

However, all UK residents aged sixteen or over can earn tax-free interest in a cash mini-ISA, which means higher returns and no fiddling about with tax returns! You can invest from £1 to £3,000 per tax year in a cash mini-ISA. What's more, you're not tied to a single provider, so you can be a "rate tart" and open a Best Buy account with a different provider each year, if you wish. Hence, cash mini-ISAs are an absolute no-brainer for savers!

You can earn 5% AER tax free in our Cash mini-ISA centre!

2. Ignore notice accounts

Many savers choose to tie up their money in notice accounts, in the belief that these pay higher rates in return for restricted access. This may have been true in the past, but it's not longer the case. In fact, table-topping Best Buy no-notice accounts usually beat the rates charged by almost every notice account. Hence, why bother putting handcuffs on your savings when it doesn't pay to do so?

You can earn up to 5.25% gross a year in our Savings centre!

3. Watch out for introductory bonuses

One way that savings providers manipulate the Best Buy tables is through the use of introductory bonuses. An account paying, say, 4.5% a year is pretty good, but not quite good enough to earn a seat at the top table. However, by adding, say, a six-month introductory bonus of 0.75%, it gets promoted to the Premier League of savings accounts.

I'm not opposed to introductory bonuses in principle - indeed, my money is earning one at the moment. However, bonus accounts do demand more discipline from saver than no-strings accounts require. I'm happy to move my "hot money" around every six months in order to earn more interest, but you may not feel this process is worthwhile. If not, avoid accounts with introductory bonuses of less than a year's duration.

For the record, the highest rate for an account with an introductory bonus is 5.25% gross a year from Cahoot's Bonus Savings account, which I wrote about here. Beat that!

This account is available in our Savings centre.

4. Beware of rate cuts

One mistake that millions of savers make is to take their eye off their interest rate, because banks love to "bait and switch" savers. They do this by launching first-class savings accounts then, after all the fuss has died down, quietly withdrawing them and begin slashing rates behind the scenes. One way to keep a close eye on your savings rate is to visit your bank or building society's website and find the page which lists your interest rate. Add this webpage to your Favourites folder (hit the "CTRL" and "D" keys together in Internet Explorer) and check it, say, monthly. This enables you to react swiftly if your Best Buy turns into a Duff Buy!

For example, when ICICI Bank, the UK arm of India's second-largest bank, launched its HiSAVE account earlier this year, it paid a market-beating 5.40% AER. However, ICICI will cut its rate by a quarter-point to 5.15% AER from 1 November. However, this remains one of the highest no-strings rates, so ICICI customers are still enjoying a top rate of interest.

5. Watch out for teething problems

When an unbeatable savings account appears in the Best Buy tables, it's often swamped by a huge wave of money. UK residents have £541 billion in savings, and if even a tiny fraction of this cash mountain heads for a new account, customer service often collapses!

These early-day glitches happen all the time, for example, when Abbey launched a top-rated cash mini-ISA, when ING Direct launched its no-strings, high-interest account, and when recent entrant ICICI stunned the market with an account paying 5.40% AER. All of these firms were overwhelmed by demand and took months to get their service levels back on track. Hence, it's often worth waiting a few weeks or months, leaving other savers to be the guinea pigs that test the system!

I hope that my advice helps you to become a superior saver!

More: You'll find several ace accounts in our Savings centre! Earn 5.25% On Your Savings.