Santander’s 123 account was one of the market leaders in the high interest current account market, paying interest in increments of 1, 2 and 3%.
Most notably there was a rate of 3% paid on balances between £3,000 and £20,000, which made the account very attractive as an alternative to ISAs for savers.
But the bank announced that from November 2016 there will be one flat rate of 1.5% for all balances up £20,000.
This decision follows hard on the heels of the Bank of England’s (BoE) base rate cut, and it’s possible we might see other banks cut their interest before the end of 2016.
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Is a Santander account still worth it?
Reza Attar-Zadeh, Head of Retail Products, Santander, said:
“Although we are making changes, the new interest rate of 1.50% on the Santander 123 Current Account is a very competitive instant access rate on balances up to £20,000, which means customers can earn up to £298 per year in interest, plus cashback, for an account fee of £5 per month.
“Customers will continue to have access to preferential 123 World offers and, on top of this, they can earn more cashback using our Retailer Offers.”
Santander 123 customers can earn:
- 1% cashback on water and council tax bills and for the first £1,000 of Santander mortgage payments
- 2% cashback on gas and electricity bills
- 3% cashback on mobile and internet, phone and TV bills
To qualify for the cashback you need to pay at least £500 into your account each month, this can’t come from another of your Santander accounts, as well as having at least two active Direct Debits.
What other high interest accounts are left?
There are still several high interest accounts on the market paying up to 5% interest, though some catches and limits do apply.
But these remain an attractive deal for savers, especially after the government declared the £1,000 of interest tax free (£500 for high rate tax payers) from all savings accounts in April 2016.
TSB Classic Plus Account
The Classic Plus Account from TSB will pay 5% interest on balances under £2000, however to qualify for the 5% interest you need to deposit at least £500 a month and use paperless internet banking.
Nationwide pay 5% interest on balances under £2500 with their FlexDirect Account.
But this high rate is only available for the first 12 months and reverts to 1% after. You also need to pay in at least £1000 a month to qualify for the 5%, which cannot include transfers from another of your Nationwide accounts.
Tesco Bank Current Account
Tesco have a fairly no nonsense approach to paying a “high” interest rate on a current account. You can earn 3% interest on all deposits under £3,000, with no fee or minimum monthly deposits required.
Should you get an ISA?
ISA rates have taken something of a hit since the BoE put base rates at historic lows in 2009, and are likely (if it’s even possible) to fall further after the BoE took rates even lower in August 2016.
However, despite the low rates of 0.5-1%, ISAs remain a safe bet for your money. Deposits up to £75,000 are guaranteed under the Financial Services Compensation Scheme and any interest earned on ISA deposits is not subject to income tax.
Currently the most you can pay into an ISA is £15,240 each year, but this will increase to £20,000 from April 2017.
For younger savers – Help to Buy and Lifetime ISA
The government is offering a guaranteed 25% bonus to add to savings with the Help to Buy ISA and new the Lifetime ISA, which is set to be introduced in April 2017.
However, a few catches apply.
The Help to Buy ISA is only for people who do not already own a home as the 25% bonus is only available when you buy your first home.
Deposits are limited at no more than £200 per month and £12,000 in total (but your first deposit can be a £1,200 “kickstart”). You need to have at least £1,600 in the ISA to claim any kind of bonus.
The Lifetime ISA will be available to savers aged 18-40 as of April 2017 and will offer a 25% bonus, but this will only be payable after you turn 60 or if you use the money as a deposit on your first home.
You can deposit up to £4,000 a year so someone putting in the maximum amount every year from the age of 18 to 60 (which is unlikely), could deposit £168,000 and get a guaranteed bonus of £42,000 at the end.
Could you it be worth offsetting your mortgage?
Offsetting your savings against your mortgage effectively enables you to save at your mortgage rate.
An offset mortgage is much like a normal mortgage, but you can deposit savings with your mortgage lender.
Instead of paying interest on your deposited cash, they will consider it a temporary overpayment and offset it against your mortgage.
For example, if you had a £150,000 mortgage and £20,000 of savings, you could deposit your savings with your lender and you’ll only be paying interest on £130,000 (but you’ll still owe £150,000).
If your mortgage APR was 3%, you’d be saving around £600 of interest charges a year from your mortgage by doing this.
If you could only get a 1% AER rate paid on £20,000 (earning £200 per annum) from a savings account, then you’d be roughly £400 better off by offsetting your mortgage.
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Consider bonds and gilts
Government bonds or gilts, as they’re referred to in the UK, are a staple of sensible investment funds. They offer a guaranteed, if modest, return from the government and are sold with a set term (maturity) on them.
Gilts can be bought either directly from the UK Government Debt Management Office or from a broker.
Premium bonds are also a safe place to put your money, but offer no guaranteed return at all. Returns come in the form of ‘lottery’ winnings which can be anything up £1,000,000.
Higher returns from investments
Investments in stocks and shares can offer good returns for your money, but are accompanied by a degree of risk where your deposits aren’t guaranteed and you may end up with less than you initally invested.
As a rule there is a unfortunate relationship between risk and return, the higher the return the greater the risk. Generally speaking it’s especially risky to pursue short term returns from market investments.
In any case make sure to seek independent financial advice before engaging in any kind of investing.
Is it worth becoming a buy to let landlord?
Becoming a buy to let landlord could be a good way to put your money to work, with rental income covering mortgage repayments and possibly supplementing the returns you could make from the eventual sale of the property.
But it’s worth noting a few things about becoming a landlord, before you head down this route.
- Treating property as an investment is a risk just the same as any investment – the price of your property is not guaranteed to rise and you shouldn’t assume it will.
- It can be hard work being a landlord, you have legal obligations to maintain the property and provide a good standard of service to your tenants.
- You need to approach renting out property as a business, making sure you have tenants and rental income, as well as making sure you are paying the correct tax and taking care of all the paperwork and legal details.
- Tax relief for landlords has recently been targeted by the government making buy to let marginally less lucrative.
What do you plan to do?