Five ways to get a 5 per cent return on your savings

 

Britain’s army of savers are turning into one of the biggest victims of the recession, as interest rates continue to plummet.

More than a third of deposit accounts aimed at ordinary savers now pay 1 per cent or less, according to Moneyfacts.co.uk, and with the base rate dropping by another 0.5 percentage points today, the prospect for savers in 2009 is looking increasingly bleak.

However, there are still some ways to get a return of 5 per cent – but hurry, as these deals may not be around for long.

1. Fixed rate bonds

Generally savers can obtain the best return if they are willing to stash away their money for 12 months or more, forfeiting the interest if funds are accessed early.

Close Brothers, the investment bank, is offering 5 per cent on its new two year bond – but customers must deposit at least £10,000, and the rate is guaranteed only on applications received before close of business next Tuesday. Up to £50,000 is protected by the Financial Services Compensation scheme as normal.

2. Regular Saving accounts

Some of the best rates are currently on regular saving accounts – where savers must deposit a minimum amount each month. Most of the best accounts offer a fixed rate for a certain amount of time – Principality building society Regular Saver Bond is offering 6 per cent for six months, with a maximum deposit of £500 per month. Barclays Bank has a fixed rate of 5.84 per cent for 12 months on its Monthly Savings account, with a maximum of £250 deposited per month.

However, remember that with most accounts you will not be able to access your money until the end of the term – and you will not earn the headline rate on the entire amount saved.

David Black of Defaqto said: “Many people wrongly assume that if they invest £100 a month for a year at 5 per cent that they’ll get gross interest of £60 (i.e. 5 per cent on the entire £1,200). In reality only the initial monthly investment that will earn interest for a full year. The actual interest earned would only be £32.50 for a non-taxpayer, £26 for a basic rate taxpayer or £19.50 for a higher rate taxpayer”

3. Children's accounts

If you are saving for your child’s future, remember that better returns may be obtained by using an account specifically for children.

All children born after September 1, 2002 are eligible for a Child Trust Fund, where savings can grow tax free until the child turns 18. Parents can open either a savings account or one that invests in stocks and shares, and the maximum that can be invested in the fund is £100 a month, or £1,200 a year.

For parents opting for a cash account, Hanley Economic building society is currently offering 5.5 per cent. Just remember that only the child will be able to access the funds, and not until they turn 18.

There are many other types of savings accounts aimed at children – Halifax is offering a great rate fixed at 8 per cent on its Children's Regular Saver. Parents can open the account on behalf of a child and must deposit between £10 to £100 every month. The rate is fixed, but only for 12 months, and no withdrawals are allowed during that period.

Nottingham building society is offering 7.5 per cent on its Children’s Regular Saver – a minimum deposit of £10 must be made every month. Again the rate is fixed, but only until December 15 2009, and withdrawals must not be made before then.

4. Bonus accounts

These controversial accounts lure customers in with a high “bonus” rate, which usually lasts for the first six or 12 months, when it drops to usually at least 1 per cent lower.

Critics say that banks rely on customers forgetting to move their money once the deal expires, and that savers should pick accounts that offer consistently high rates. However, if you are organised enough to move your money after the bonus expires, it is possible to take advantage of some good deals.

Today saw the last bonus deal above 5 per cent, from Tesco, disappear - the account is now paying 3.6 per cent. ING Direct’s Savings Account is offering 4.89 per cent, with a minimum deposit of £1, but this rate drops by 2.17 per cent to 2.72 per cent after 12 months.

Remember that these accounts are variable-rates, meaning the headline rate – and therefore the rate it converts to once the bonus period ends – could go down.

5. Corporate bonds

Corporate bonds involve lending money to companies in return for a fixed amount of interest. This is riskier than putting your money in a savings account, because the value of the bond fluctuates and companies could go bust and be unable to repay. However, yields are currently at an all-time high.

Chris Bowie, manager of the Ignis Corporate Bond Fund, said: “Investors can achieve comfortable double-digit yields on household names. Sainsbury's, for instance, has a 14 per cent yield while investors can secure 16 per cent with Barclays, HBOS or RBS. Aviva is yielding 15 per cent and Standard Life 12 per cent. Even away from financials and retailers, there are yields of 10 per cent with the likes of Firstgroup, BT and Imperial Tobacco.

"Bonds are not risk-free and the default risk is undoubtedly higher than in recent years. Some companies will fail in 2009 but these are unlikely to include high street supermarket chains or banks.

"Also the lack of liquidity in corporates means that it is difficult to get out of the asset class cheaply, so a corporate bond investment has to be for the long-term, at least for a year.”

Corporate bonds can be quite complicated to buy, so it is better to invest in a well-managed fund.
Juliet Schooling of Chelsea Financial Services says: “Our favourite corporate bond funds include the Henderson Strategic Bond, M&G Optimal Income and L&G Dynamic Bond.”

By Lauren Thompson

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Comments

[magnush]

Savings rates in SA are still as high as 12,5% AND you could make some capital gains if the pound drops further against the rand.

[Merv Owen]

Where does one find an RBS Corporate Bond paying 16%? RBS currently offer less than 3% Perhaps Chris Bowie can enlighten us!

[sam]

The bible says 'money grows wings and flies away'... better to invest in things that can't rot or rust or disappear with the next economic crisis, I'm off to Mexico to start an orphanage, no funds, just my faithful, ever loving Father, who provides all that I could ever need xxx

[Leigh Vernier]

I'm thinking of launching a "Somali Pirates Hedge Fund". Patron, Lord Mandelson of Indujah.
Trustees, B-Liar, and Baby Bush.

With any luck I'll get McBroon and
(nobody's) Darling to lend me a few million.
Applications to: Cayman Islands....

[Derek Bevan]

What good is 5% anyway,when the taxman takes 20% of the proceeds,and inflation another 4.2% ! !

[Derek Bevan]

Bonds are OK providing they let you have YOUR money at the end of the term.

[Kevin]

Principality 6% Regular Saver is being withdrawn at close of business on Monday. Act fast or it'll be gone!

[hallelujah]

Why not have an offset mortgage, interest rates at mortgage levels, and no tax to pay. Surely a good bet if you can get one?

[colin mayne]

with regard to Louis B how do you get 12% in south africa i'd join you

[Michael]

Take your money ,if you have over £30,000 out of UK put it into the Dutch banking system , for instance you will still get 3.5% from ABN AMRO - look up their website - but you need to put in at least I think Euro25,000 if non resident

[Ron Durham (NZ)]

Try RaboPlus NZ (run by Rabo Bank NZ) savings account, at 5.60% on-call. Rabo Bank is rated the 4th safest bank in the World (1st safest private bank in the World). Signed-up to NZ Government's guarantee fund.

[slashnews]

"Bonds are not risk-free and the default risk is undoubtedly higher than in recent years. Some companies will fail in 2009 but these are unlikely to include high street supermarket chains or banks.

[Paul Cooke]

savings? I'm putting all mine in Premium Bonds... (I've less than 30,000 anyway) and who knows, I may get lucky...

[Louis B]

I am moving my savings to South Africa where I can get up to 12% interest. It's as safe there as it is here.

[londonmum]

Try zopa.com, the peer-to-peer lending site. Although you commit to tying up your money for three years, you can currently get 9% return. I have been lending for almost two years now.

[Philip Walker]

"a corporate bond investment has to be for the long-term, at least for a year."

Long-term = a year. And people wonder why we're in the mess we're in...

[Ruth]

Chris- I have savings. I'm 19 years old and since february 2008 managed to save £2K, starting with all of my bday money from my 18th (£300) and adding here and there.
As soon as I got a full time job I started putting in £300 a month. That's the equivelent of my monthly rent before utilies and food costs.

If you've got nothing to save it's because you're living like an idiot, robbing Peter to pay Paul.

Compound interest favours the young, but I'm getting ripped off with my ISA interest rate down to 1.5%! It's all going to go in a 4% bond ASAP!

[Chris]

I wouldn't bother.. This country has been a write-off since the mid-20th century. Best to emigrate now

[Father Ignatius Brown]

Surely, if asset price deflation sets in, holding cash could still make sense even with zero rates (that certainly seems to have been the case in Japan these last 10 years)?

Why risk capital on the FTSE today (at around 4400) when in 5-7 months you might be able to pick it up at 3500? Why buy a house today when you will be able to buy it for 20% less in 12 months time (and your rent is linked to CPI)? Why buy a new car today when your 10-year old VW is still running smoothly and you will be able to buy a new one in say September for 15% less than today.

Even if the socialists impose a tax on savings accounts it would have to be onerous (and so political suicide) to justify me spending my savings on assets I don't need or still feel are over-priced.

[surfer]

While the Tesco deal might have been true yesterday, as of January 8th their Internet Saver is now only paying 3.60% gross.

[Chris]

Seriously - who has any savings? I've been living on credit for the last six or seven years now. I'm being taxed more or less every single penny that I earn! There hasn't been anything left to save. There hasn't been a lot to show for the last decade at all frankly. God help me and all the millions of others in the coming years.