Getting the best return from your savings
by John Kemp
When I was a child, I had a money box from my bank, and we bought savings stamps at the post office. The 6d (2.5p today) stamp had a picture of Princess Anne on it and the half-crown version (12.5p) displayed a very young Prince Charles. We were encouraged to save for the future, to buy something special or simply rainy-day money for future emergencies. Credit cards had not yet been invented so there was no easy way to borrow money.
Saving money was worthwhile because interest rates were much higher than today – they varied but often between 7.5% and 10% in the 1950s and 1960s. Today, because we have had years of low inflation, savings rates are very low. The average instant access savings account is currently paying 0.1% interest. What this means is that if you have savings of £5,000 and leave it untouched for a full year, you will receive interest of £5, sufficient to buy one large Big Mac Meal.
There are many different opportunities for saving but most involve some risk. Over the years, investing in stocks and shares has offered much higher returns than cash but values can go down as well as up. A key advantage of cash savings in a bank or building society is that savings of up to £85,000 are guaranteed. Provided the provider has a UK banking licence the Financial Services Compensation Scheme (FSCS) guarantees savings of up to this amount.
So where can you get the best return for your savings? Nationwide Building Society is one of the country’s largest and best-known savings institutions. An immediate access savings account pays an interest rate of 0.1%. for savings of up to £10K. This goes up to 0.03% for savings up to £50,000 and 0.5% for savings in excess of £50K.
The highest rate on the market at the time of writing is 0.65% offered by Tandem Bank, but before doing my research I’d never heard of it. It has a UK banking licence, so savings are protected up to £85,000 but looking on-line, its customer service is not highly rated. Trustpilot rated it 2.9 out of 5. People who disliked their service mention accounts getting blocked with their funds frozen, unresponsive customer service and technical problems with the app.
It is described as a British Challenger Bank and obtained its banking licence by taking over the old Harrods Bank. Maybe not a good idea?
So what is a saver to do? If you want to save for something special or simply want to have some cash available for emergencies, my suggestion is to forgo the paltry interest and take a safe gamble on Premium Bonds.
You can invest as little as £25 and as much as £50,000. Your money is safe, and you can get it back in just a few days. You also have the chance, albeit a small one, of winning a million pound prize.
Premium Bonds are operated by National Savings & Investments (NS&I) which is one of the largest savings organisations in the country but also a government department. Customers who invest are effectively lending to the government and , in return, it fully guarantees their savings.
The easiest way to buy Premium Bonds is online but you can get an application form and submit it at a post office if you prefer. You can start with as little as £25 and add or withdraw money at any time. No interest is paid but 1% of the value of investments is used to create a prize fund which is distributed each month.
Your money must be invested for a full month before it is entered into a draw but from then on you have the chance of winning a cash and tax free prize every month.
The amount and number or prizes can change depending on the number of bonds issued but currently there are two monthly prizes of £1 million and other substantial prizes of £100K, £50K and £25K. The current breakdown of prizes is shown on the right.
As can be seen from the chart, the chances of winning a million are low (1 in 54.64 billion) but not impossible. Many savvy savers invest the maximum £50,000 and regularly receive small prizes of £50 or £25 which can result in a higher interest rate than received from a conventional savings account.
But the point to remember is that you have a chance of winning a cash prize, but it costs you nothing; your investment remains intact. And although the chance of winning big is low, it’s not impossible. Looking back at recent prize winners, last month there was a £25K winner for someone with only £55 invested since November 1979 and in July a £1 million winner only had £1000 in bonds since July 2020.
Small prizes are notified by email and credited directly to your bank account but if you win a million you get a visit from Agent Million (see below)
So if you want to save without risk, my recommendation is Premium Bonds. It’s easy to do, risk free and more fun than a conventional savings account.
This article is provided for information purposes only. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The investment referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.