Got a question about your savings? Email in and we’ll get one of our experts to reply. James Blower, the founder of The Savings Guru, has given his advice to a reader below. If you have a question for our experts, email us at [email protected].
‘I have recently been given £20,000. Where is the best place for me to put my money to grow? Is it best to put in Premium Bonds, a one-year fix or somewhere else?’ Carol B, Lancashire
James replies: The starting point is to think what you want to do with your money. If you don’t need it now and are looking to grow it over the longer term (5 years-plus) then it is worth looking at investing. You could invest it in a fund, a basket of different stocks and shares, and if the total value of your investments increases more than the price you paid you make money, and vice versa. This carries a risk but historically money invested has performed better than cash over a five to 10 year timeline.
If you might need your money within five years, cash savings are ideal and more appropriate as there is no risk, if they keep within the Financial Services Compensation Scheme limits of £85,000, and the returns are guaranteed on many products. Under £85,000 and the Government will pay you any money lost if your bank goes bust; above this limit it will not.
There are some great easy access-accounts now with Chip paying a top rate of 3.15 per cent via their mobile app and Paragon Bank paying 3.1 per cent online on their Triple Access Saver.
If you haven’t used your ISA allowance, then you may want to put your £20,000 into an easy-access ISA – Shawbrook pay a top rate of 3.01 per cent and this will protect the £602 of annual interest you will receive from tax. These returns are variable though, so they could be changed by the bank. However, with the Base Rate continuing to increase, there is more likelihood that these rates will improve in the short term, rather than reduce.
If you don’t want access to their savings then Al Rayan pays 4.57 per cent on a three-year fixed deal – the best rate on the market – but their 4.31 per cent for a one-year fix is a great rate too. Personally, I don’t think there’s enough of an increase to lock away for longer. SmartSave Bank pays 4.26 per cent on a one-year fix as an alternative.
A compromise could be to put half in a one year fix and half in easy access accounts which will yield an average rate of around 3.7/3.8 per cent, depending on which accounts you choose, which is good for no risk.
The benefit of the easy-access accounts is that you can get your money whenever you want. The downside is the rate could change and tends to be lower than if you tie your money up. The fixed rates pay a guaranteed rate and one that is about a third higher. The trade-off is that these accounts are not accessible.
While banks will often look sympathetically at requests to access them in exceptional circumstances, like a serious or terminal illness or redundancy which creates financial hardship, this is discretionary and there’s no automatic right of access.
Premium Bonds are the nations favourite savings product with over £120bn saved in them. But they are only worth considering if you want the thrill of a potential big win.
The Bonds are a form of investment offered by National Savings and Investments (NS&I). Instead of earning interest on their money, bond holders are entered into a draw at the start of every month, with tax-free prizes worth between £25 and £1m.
Although the rate is going up to 3.3 per cent from March, remember that to pay the top prizes, the average rate most Bond holders will win is much less than the published rate. A holder of the maximum amount allowed, £50,000, is likely to average a return of around 2.7 per cent, significantly less than the prize rate advertised ratewonder i and much lower than the best buy interest rates on easy access.
You may only want to look at these if you are prepared to take the risk on getting no prizes. However, if the amount you have received is substantial and will use up their ISA and Personal Savings Allowance, they can be a good home for money over and above these limits as there is no limit to the money protected by savings with NS&I, as they are guaranteed by the government, and the prizes are tax free.