On January 10, the Bank of England voted to maintain the base rate at 0.5 percent. The rate has been at this record low level for nearly four years, causing many savers to wonder when it will increase.
Some consumers are torn about how to save their hard-earned money.
They want to receive the best return and this may involve investing in a multi-year, fixed rate bond or placing it in a bank savings account.
Bonds Vs. Easy Access Savings Accounts
With a top-paying, multi-year bond, some consumers have received higher returns than easy access savings account holders have. Had interest rates increased during the bond term, they would have been in a less attractive position than if they had waited to invest.
The best three-year bonds were paying four percent in April 2009. As of April 2010, they were paying 4.60 percent.
Individuals who commit to a particular approach risk not earning as much as if they had waited a bit. Those who choose to wait and see what happens may not earn as much as they would if they had saved money elsewhere. Savers who fall into the “wait and see” category can use an easy access account until the base rate increases.
Though this account will only be used temporarily, it should pay a good interest rate and provide easy access to money without interest forfeiture. Savers should shop around for the best rates and should beware of introductory bonuses. These special interest rates typically run for the first 12 months that the account is held. After that time, the rates decline to less attractive levels.
Using The ISA Allowance
Savers who are able to should use their ISA allowance for long-term savings. For the 2013-2014 financial year, up to £5,760 of the £10,680 ISA limit can be invested in a cash ISA. This investment grows tax-free, providing consumers with a budget-friendly way to increase their savings.
For basic rate taxpayers, a cash ISA with a 3.06 percent interest rate is the same as a 3.83 percent savings account. For those who pay higher rate tax, it equals a 5.10 percent account.
Easy access savings accounts may require a minimum investment, though this may be as low as £1. Bonus rates may be tiered based on account balance and the number of free withdrawals may be limited.
If you are a wait and see saver, shop for the best terms and stash your money so it will grow until an increased base rate makes fixed rate bonds more attractive.