Savings – What are my options?

There is a popular misconception that we debt ravaged Britons are racking up horrifying levels of debt and comprehensively failing to save any money. In fact, whilst the debt part is regrettably true, according to a recent report by Alliance and Leicester savings Brits are on the brink of saving a whopping £1 trillion - not far off our collective personal debt of £1.36 trillion. When you consider that 85% of this debt is in mortgages then the overall complexion of the nation’s personal finances starts to look considerably less grim than you might think. It seems Brits are quietly squirreling away more than they’re generally given credit for. So, if you haven’t already, maybe it’s time to jump on the savings bandwagon.

Having decided to start saving you’ll want to make sure that you’re getting the best possible return -so where’s the best place to hoard all that hard won cash? Let’s start with ISAs or more specifically Cash ISAs. As you might already know, the big appeal of an ISA is that, unlike a regular savings account the interest you earn from an ISA is tax free, meaning that your returns are likely to be better and you won’t have to declare any earnings from it on your tax form.

Your annual Cash ISA allowance is currently £3000 (it will be increased by a further £600 for 2008/9) so with the end of the tax year rapidly approaching perhaps now is the time to think about using up that allowance. To illustrate the potential for significantly improved savings returns, a basic rate taxpayer with £9,000 in a 6.3% AER Savings Account would actually end up paying 5.04% after the taxman’s taken his cut. Clearly an ISA with a competitive AER would end up with considerably better returns.

The market leading Cash ISA at the moment is probably the ING Direct ISA which offers an interest rate of 6.55%; an AER that, after tax, you’d be hard pushed to find matched by any savings accounts. Keep in mind however that the ING ISA drops to a variable rate of 5.13% after six months so in the longer term there may be better deals out there. National Savings and Investments for instance guarantee a rate that will remain 0.55% above the base rate until next April and the Icesave Easy Access ISA will beat the base rate by 0.3% until January 31^st 2011. Both of the above require a minimum investment of £1000 however.

For comparison’s sake, or if you want to save more than your £3000 Cash ISA allocation, the best savings accounts around at the moment include the Alliance and Leicester eSaver savings account which offers 6.5% AER and balances of up to £75,000 (A&L also offer an ISA) and the ICICI HiSave account which offers 6.41% with a guarantee of beating the base rate by 0.30% until December 2011.