As we go crashing into a new year, you may be looking for ways to improve your finances. Reducing your spending and finding an enjoyable side hustle can be great ways to grow your bank balance, but if you’re looking for a low effort way to improve your financial situation, it’s wise to assess where you keep your money.
Here are just a few options to consider:
Savings Accounts
There once was a time when savings accounts were considered a rewarding place to put your money. You’d receive interest on the money you held in your account and this would help your savings keep up with inflation. For those with lots of savings, interest can become a source of income in itself. Unfortunately, savings accounts have become less rewarding over recent years and good deals are hard to find. At the time of writing, Money Saving Expert says the best savings accounts available include:
- Investec (0.55% on between £5,000-£250,000
- Atom Bank (0.5% on up to £100,000)
- Aldermore (0.5% on between £1,000 to £1m)
- Virgin Money (2.02% on up to £1,000)
This list is not exhaustive and there may be similar interest rates with other bank accounts not included above.
Current Accounts
Did you know it’s often possible to get a higher interest rate on current accounts than it is on savings accounts? Sadly current accounts aren’t as profitable as they used to be, but read on to learn more.
High interest current accounts are hard to come by
A few years ago, it was possible to generate a modest income from spreading your savings across multiple high interest current accounts rather than leaving it all in one designated savings account. Unfortunately, those days have become a thing of the past and as each month goes by, it feels like more and more banks are dropping their interest rates.
At the time of writing (January 2021), the most generous current accounts in terms of interest are:
- Virgin Money (2.02% on up to £1,000)
- Nationwide FlexDirect (2% on up to £1,500)
- Bank of Scotland Vantage (0.6% on up to £3,999.99 and 1.5% on balance between £4,000-£5,000)
- Club Lloyds (0.6% on up to £3,999.99 and 1.5% on balance between £4,000-£5,000)
This list is not exhaustive and there may be similar interest rates with other bank accounts not included above.
Switching incentives are a thing of the past
Switching incentives such as £150 cash have also become a thing of the past, though we’re hopeful that banks will start up these rewards once the pandemic is over. At the time of writing, the only switching incentive available is Virgin Money’s 15 free bottles of wine (alcohol free is available) reward for switching to them.
Digital-only banks could be rewarding
Digital-only banks such as Starling and Monzo have grown in popularity in recent years, largely down to their accessible apps and commitment to making money management enjoyable rather than a chore. These accounts don’t offer particularly generous interest rates either but you may find that the transparency of their apps encourage you to save more money than you’d earn in interest.
Negative interest rates could become a reality in 2021
HSBC has warned it may start charging customers for holding an account with them, with other lenders considering similar action due to the record-low interest rates we’ve seen this year. Money Saving Expert Martin Lewis warns that the best way to protect yourself from negative interest rates is to lock your money away in a fixed-rate account. He says: ‘What everyone with savings should do certainly is make sure you’re maximising your money. And if you’re scared of negative interest rates, go and lock in with a fix, providing you won’t need to withdraw money in that time.’
ISAs
You’d be forgiven for finding ISAs confusing, so here are the basics you need to know:
Tax-free savings and investments
An ISA is a savings or investment account you don’t have to pay tax on. You can save up to £20,000 a year (for 2020/2021) in your ISAs and any interest you earn will be tax-free.
You’re allowed more than one ISA but they cannot be of the same type. For example, you can only have one cash ISA, one stocks & shares ISA, one innovative finance ISA and one Lifetime ISA - but you can have one of each if you wish.
Saving a deposit
Saving a house deposit? There’s an ISA for that! The Lifetime ISA allows people to save up to £4,000 a year of their own money and benefit from a 25% top up from the government. The money can be used towards a deposit on a property or to fund retirement.
If you already have a Help to Buy ISA, this works in a similar way except you can only place up to £200 a month into it and it can be used only to buy a property. Unfortunately, the Help to Buy ISA is no longer available to new customers like the Lifetime ISA is. Those who already hold this type of ISA can continue to save in it and benefit from the government bonus when they come to buy their first home.
Premium Bonds
Premium Bonds are a type of investment product, but instead of earning interest or regular dividend income, you’re entered into a monthly prize draw where you can win between £25 and £1 million tax-free.
Martin Lewis has long been a Premium Bond skeptic because of how unlikely they are to keep up with inflation. You could win big money by buying Premium Bonds instead of keeping your cash in traditional savings accounts, but statistically speaking, your chances of winning are so slim that inflation is more likely to eat away at the value of your money. That £1,000 you put in your Premium Bonds now won’t buy you as much in 5 years, for example.
“70% of people with £1,000 in Premium Bonds win nothing,” the finance expert warned in a recent episode of The Martin Lewis Money Show. If you have £10,000 in Premium Bonds and what he describes as ‘typical luck’, you’re unlikely to win more than £75 a year.
For most people Premium Bonds won’t beat savings accounts, but Martin Lewis says if you have more than £10,000 to put in; you’re saving for a long period of time but want easy access to your cash; you pay tax on savings interest or you don’t care about interest and want the thrill of potentially winning big, they could be worth considering. Visit Money Saving Expert to learn more before deciding if this option is right for you.
Pensions
The stock market has been hit hard by the pandemic and many people have seen the value of their pensions decrease, but if you don’t want to work forever, a pension is still a worthwhile asset to have. If you’re employed, not only will your contributions benefit from tax-relief but you’ll also get employer contributions. Think of this as a pay rise and free money from your boss!
Self-employed people have plenty of options too, from personal pensions to the Lifetime ISA which allows you to save for a home and retirement at the same time.
The stock market
If you have a solid emergency fund, no expensive debts, and savings set aside for any short-term goals (such as holidays, a new car, a wedding etc), investing any additional money into the stock market could be worth exploring.
If you’re a beginner to the world of investing, it may be worthwhile investing in funds rather than individual stocks. By choosing funds that track the performance of the stock market instead of guessing which companies will perform well yourself, you can grow your money without taking on too much risk. Make sure you do plenty of research before investing and keep in mind that your capital is at risk.
We can’t tell you exactly where to put your money in 2021 because the best place for you will depend on a range of factors such as your income, the amount of savings you already have, the stability of your job, and the age you want to retire. However, we hope this post has given you a few options to consider and with the help of a little more research, you can find a sensible place to grow your money.
