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Savings rates may have taken a hammering over the last year or so, but there are some easy steps you can take to ensure you get the best return on your hard earned cash.
With base rate at a record low of 0.5% there are many savings accounts now offering a rate close to zero.
However, don't despair, there are still ways to bring your savings return back up to a more rewarding level. Here are just a few ideas to get you started:
1. Current accounts that pay interest on credit balances
Interest bearing current accounts can offer a good rate, but just be aware that most impose a limit on how much of your savings are eligible for interest; this is typically about £2,500.
Alliance & Leicester's Premier 21 account offers in-credit interest of 5% on the first £1,000, while its Premier Direct current account offers the same rate but on the first £2,500.
The 'credit option' current account from Abbey also pays 5% on the first £2,500 for the first 12 months.
Halifax gives you the chance to get something back from your current account in a slightly different way. Their Reward Current Account gives you a net payment of £5 per month regardless of the balance, as long as at least £1,000 is paid in each month. On £1,000, this equates to a savings rate of 7.5%, so well worth a look.
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2. Regular saver accounts
There are some great deals among 'regular saver' accounts at the moment that could see you earn the best savings rates on the market. The top rate currently comes courtesy of the Buckinghamshire Building Society Chiltern Gold Mine account which pays a whopping 6.25% fixed for 12 months. The Halifax and NatWest Regular Saver accounts both pay a very creditable 5%.
Just bear in mind that you must make a payment into the account every month, usually between £25 and £250, and no withdrawals are permitted, but they are a great option if you're looking to build your first savings pot.
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3. Zopa
The days of earning 7% from UK banks and building societies are long gone. The closest you are likely to get to this now is via online lending website Zopa. The site is currently offering eye watering savings rates of up to 8.1%.
Although this is considered a lending site, it is one where members of the public lend money to one another, so the lender receives the loan rate, minus charges, as an effective savings rate.
As the loan rates on the site range from 9.8% to 14.1%, depending on the quality of the borrower's credit file, the average rate paid to lenders is around 8.1%.
With Zopa there is no savings protection that you would normally receive via the Financial Services Compensation Scheme. However, your risks are not tied to one borrower because the money you lend is spread over many individuals, so the chances of losing all your money are very slim. Zopa operates a rigorous credit score process and to date has seen very low default rates, but your return is not guaranteed so you need to bear this in mind.
4. Consider an offset mortgage
This is a great way of saving money, particularly in the current environment when savings rates have been decimated but mortgage rates remain comparatively high.
Offset mortgages work by offsetting your savings against your outstanding mortgage, which means that you only have to pay interest on the net balance. For example, if you have a £160,000 mortgage and £50,000 savings, then in return for not receiving interest on the savings you will only pay interest on £110,000 of your mortgage.
Your savings may have only been earning a rate of 1%, but you may be paying 5% on your mortgage borrowing. While you will lose the 1% return you would have got on your savings, you will gain substantially more than this by not paying 5% interest on that £50,000 of your mortgage.
This will either reduce monthly payments, or you can keep the same level of payments and clear your mortgage much earlier. Offsetting is also tax efficient as while you would pay tax on your savings income, there is no tax charged on the equivalent saving you are making on your mortgage.
The beauty of an offset mortgage arrangement is that your savings are still accessible if you need them, if you withdraw them then the level of your mortgage liable for interest will simply increase.
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5. Make use of your tax free savings allowance
It's not often the government gives you something for nothing, that's why you should try to make the most of your annual ISA allowance where you can save up to £7,200 tax free.
At present you can save up to half of your allowance (£3,600) in a Cash ISA - just like an ordinary savings account (either variable or fixed rate) except there is no tax deducted from the interest you earn.
From 6th October the annual ISA allowance increases to £10,200 with a maximum of £5,100 in cash for anyone who will be aged 50 or over on or before 5th April 2010.
You can search for the best cash ISA accounts here. However if you are a more serious investor and are considering investing your ISA allowance in the stock market, then we have some free useful guides for you here.
Whatever you're looking to do with your nest egg, check out the best savings accounts at moneynet today and ensure your money is working as hard as it can.
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