Debts & Loans

Bank failures have put our cash in jeopardy. And inflation has robbed us of any real return on our nest eggs – despite recording its steepest fall in 11 years in October. That fall still leaves inflation at 4.5 per cent, the 13th month it has exceeded the Government’s two per cent target.

Little wonder many of us have stopped saving altogether.

As a nation, we saved nothing in the first three months of this year as money taken out of savings by some exceeded what others were saving. That’s the first time this has occurred since 1958. Last year, the amount we saved plunged from £37billion to £22bn – £2.50 out of every £100 we earned, compared with £12 in the early 90s.

It should be good news that  the pace of inflation is now slowing. Unfortunately, the Bank of England is cutting interest rates as fast to prevent deflation driving us into a slump. So it’s still just as hard to get a real return on savings. That’s tough for those on fixed incomes – such as pensioners – who need the interest on savings to supplement their pensions.

So how can you get the best available returns right now?

Pay off any debt

If you have any debt – mortgage, loan or credit card – you’re wisest to pay that off first, as the interest saved is far more than your savings can earn. Paying off a chunk of what you owe on a credit card charging 16 per cent, for example, is equivalent to earning 20 per cent before tax on your savings. Even if your mortgage interest rate is only five per cent, you’d have to earn 6.25 per cent before tax on your savings to match savings from reducing the mortgage debt.

Avoid Premium Bonds

Premium Bond fans are among the biggest losers from the fall in interest rates. The Government has slashed the interest it pays on the money we’ve invested with Ernie from four per cent last January to a tiny 1.8 per cent. There will be far fewer prizes of more than £500 and the odds against winning any one prize have widened from 24,000 to 36,000 to one. It is still a better bet than the lotto as you don’t lose your stake.

Get into shares

Now is a good time to make a regular payment into a tax-free Shares ISA. Once the stock market recovers to its previous peak you can expect a 50 per cent profit on savings.

1% above inflation tax-free

National Savings Index-Linked Certificates offer a guaranteed return above inflation on your savings. These pay tax-free bonuses that match inflation plus one per cent a year on top.

1.89% ISA above inflation

Leeds building society’s Inflation Buster ISA pays 1.89 per cent above inflation. Minimum investment is £1,000 and maximum £3,600. You can also transfer money from any existing cash ISA accounts.

1.89% inflation plus Bond

For larger amounts, the Leeds has an Inflation Buster Bond offering the same returns – but subject to tax. Both inflation busters are for fixed terms, with penalties for early withdrawals.

5.6% if you fix for a year

Fixed term accounts are offering the best returns now – five to six per cent. Birmingham Midshire’s one year Internet Fixed Rate Bond offers 5.6 per cent for a year. But your cash is locked for the whole year.

5.7% no-strings cash ISA

Tax-free cash ISAs are ideal for those who need instant access. The best, such as Kent Reliance, are still paying around 5.7 per cent – which isn’t at all bad with things as they are.

No limit grow your pension

Or get inflation- beating returns by upping pension contributions. The Government adds £20 to each £100 you invest. This gives an instant 25 per cent tax-free return – before any return on the investment.