Six alternative ways to make the most of your money as savings accounts struggle to keep up with inflation

Despite the cost of living crisis, there are many ways to invest and save, from credit unions to peer-to-peer lending to Lifetime ISAs

Six alternative ways to make the most of your money as savings accounts struggle to keep up with inflation

Rising intetrest rates are good for savers (Photo: EyeEm)

By Alys Key

With interest rates on the rise, the outlook is finally improving for savers. The top easy-access savings on the market now offer around 1.7 per cent return, while fixed-term ones can yield as much as 3.4 per cent.

But those gains are not enough to counter rising inflation, which hit another 40-year high of 9.4 per cent in June. This means that those wanting to put money away for a later date will need to get creative if they don’t want to see their savings eroded.

It’s something easier said than done. While there are many alternatives to traditional savings accounts out there, everyone has to consider different factors when choosing one. Your risk appetite, long-term and short-term goals all have an impact on the best option.

Some of the options covered in this article may not be right for you, but the best way to establish that is to do as much research as possible.

If you have a significant amount of money to save, it may also be worth consulting a professional financial adviser. Make sure they are registered with the FCA by checking the Financial Services Register, as this will give you more protection should anything go awry.

Stocks & shares ISAs

The first port of call for many savers looking to increase returns is investing. Putting money into stocks and shares can be a good option for many different kinds of savers, but the first thing to bear in mind is how long you are happy to lock the money away.

A general rule of thumb for investing is that you should be happy to leave the money untouched for at least five years. This gives time to overcome short-term lulls, such as the one we are currently seeing in the markets.

Investing is always a risk, and you must be prepared to make no return or for your investment to even go down in value. But over time, the markets generally go up.

“Investing is generally your best way of matching inflation,” says Laura Suter, head of personal finance at broker AJ Bell. “As long as you are willing for that money to be locked up for a bit of time, and you’ve done a bit of research and learned a bit about the risk.”

The easiest way to get started is with a stocks and shares ISA. With this type of account, you can use all or part of your £20,000 tax-free savings allowance for the year, and any gains you make are also tax-free.

Most newcomers opt for investing platforms which offer ready-to-go packages. These are often equity-traded funds (ETFs) which contain a broad base of stocks and shares from across the world or a specified region. There are also funds that mix stocks with other investments such as bonds. The exact composition depends on how risk-averse you are.

“Historically when you build a portfolio for a client who’s at the higher end of the scale, they will have a higher weight in equities – as opposed to the corporate bond and gilt market,” comments Stuart Belcher, founder of Resolve Financial Solutions.

Even lower-risk portfolios can still see down periods though, which is why it’s important to be holding on for the long haul.

“We’ve just gone through a market cycle where stocks have fallen, while bonds and gilts have fallen as well, which is very unusual. So cautious clients have been affected.”

If you are already familiar with investing and want to have a go at taking a hands-on approach with your ISA, there are also DIY platforms such as AJ Bell, Hargreaves Lansdown and Interactive Investor, through which you can pick from different funds, trusts and shares to build a portfolio.

There are also newer apps like Freetrade, MoneyBox and Wombat, which offer user-friendly ways to invest including extra features like investing your small change.

The most important thing to bear in mind, whatever you pick, is to look at the fees charged on funds. Platforms will usually charge you a small percentage for using their services, while further charges will apply depending on which funds you choose and whether you are performing any trades yourself.

Keep an eye on what other investments are on the market to make sure you aren’t being charged above-average fees.

The first port of call for many savers looking to increase returns is investing (Photo: Alamy)

Other investments

For more experienced investors who have significant amounts to play around with, there are also higher-risk, more specialised investments to consider.

“Outside of stocks and shares, there’s looking at things like venture capital trusts and the Enterprise Investment Scheme,” says Mr Belcher.

Venture Capital Trusts (VCTs) are tax-efficient investment schemes designed to provide funding for early-stage companies. They operate as a public limited company on the stock exchange, and invest in businesses that the fund managers think are likely to grow.

“We’ll start people off with the likes of Octopus [Investments, manager of some of the UK’s largest VCTs],” Mr Belcher says. “But there are some focused on more specialist things such as engineering or technology.”

This is where personal taste comes in, as investors can back areas where they have a particular interest. “Clients want to know they’re money’s going towards something they like and engage with,” says Mr Belcher.

One reason people are attracted to VCTs is the tax benefits. Investors get tax-free dividends, and are able to claim upfront income tax relief equal to 30 per cent of their investment on the first £200,000 invested each tax year.

Similar reasons make Enterprise Investment Schemes (EIS) attractive. They also offer 30 per cent tax relief, but with a higher limit on the size of the investment of £1m, or £2m if it’s a “knowledge-intensive company”.

NS&I

Some good news for savers came last month, when National Savings & Investments (NS&I) announced an increase in interest rates on its Direct Saver, Income Bonds, Direct ISA and Junior ISA.

However, the state-owned entity is usually not the market-leader in terms of savings rates, so it’s important to consider whether its products are right for you.

“Lots of people like NS&I because of the security it offers, but unless you’ve got very large sums, FSCS [the Financial Services Compensation Scheme] will cover you elsewhere,” says Ms Suter of AJ Bell.

FSCS covers losses of up to £85,000 if a bank, building society or credit union fails. But if you have considerable savings that would be difficult to divide up into pots below this level at different banks, Ms Suter says NS&I is a good way to protect savings.

The exception is premium bonds – savings which enter holders into a draw every month for cash prizes. The win rate was recently increased, with odds of winning now 24,500 to 1 versus a previous rate of 34,500 to 1. Of course, that still doesn’t guarantee winning anything.

“If interest rates aren’t enough to excite you and you’re willing to accept getting zero wins, you could go for premium bonds,” Ms Suter says.

Other ways to maximise your money

If you have a considerable amount of money to hand, there are other things you could do as well as saving or investing, that might even serve you better in the long run.

Match pension contributions

If you are not matching the maximum your employer offers to put into your pension each month, this is an easy thing to change straight away that will make a big difference down the line.

Add value to your house

Many people only think about how to add value to their homes when they start considering a move, leaving limited time for renovations. Even if you are settled for now, if you have the cash to hand, think about adding an extension, garden room, or loft conversion that will stand you in good stead when the time comes to sell.

Overpay your mortgage

Overpaying your mortgage is a highly personal decision that all depends on the amount you have available, the terms of your mortgage, and what you are trying to achieve. Many lenders charge penalties for overpaying, so you need to work out whether it is worth incurring these. If you have a very low-interest mortgage, you may also be better off putting money in a savings account with a higher return rate. Done right, however, overpaying means you can save thousands of pounds in interest.

Purchase insurance

If you are feeling reasonably well set-up for money right now, you could consider planning for other eventualities in the future and purchasing cover against them. For example taking out a life insurance policy, income loss protection, or critical illness insurance.

Peer-to-peer lending

A relatively recent financial innovation, peer-to-peer lending is a way people can borrow money without using a bank. As an investor, you provide cash for someone else to borrow in exchange for a return on your money. It is not a one-on-one transaction, and is sometimes called “crowd lending” to reflect the fact that many people might put money into a single loan.

But this is not an investment for the faint of heart. Borrowers can default on their loans, and even if they pay what they owe, the website running the scheme might take a cut. By putting your money into peer-to-peer lending, you are assuming all of the risk that a traditional financial institution would take on.

“If you’re looking for that next step up from cash, peer-to-peer is not it – that’s a few steps up,” says Ms Suter, warning inexperienced investors against getting involved.

The industry has been hit with controversy in recent years, following the collapse of firms including Lendy Limited, Collateral, MoneyThing, and The House Crowd. The Financial Conduct Authority has taken notice, and recently set out tighter rules for the sector, in a bid to make the risks clearer.

Should you still want to get involved in peer-to-peer lending, a good starting point is to use only a small amount of money at first, and get to grips with how it works and what the risks are likely to be.

Credit unions

As alternatives to banks, credit unions are based around the idea of financial community. They can provide savings and loans, and are often able to help people who traditionally struggle to access high-street bank products.

The difference between a savings account with a bank and one with a credit union is that the latter will normally pay a dividend instead of an interest rate. This payout is based on how well the credit union has done in that year, so the level is not guaranteed. You can look at how payouts have fared in previous years for an idea of what they might look like.

A credit union might be for you if you have struggled to access savings products at banks before, perhaps because of requirements for minimum deposits or inflexible terms on withdrawals. But they are open to everyone, and many people opt for a credit union on the basis that it is a local, not-for-profit organisation.

Government savings schemes

Rather than settling for a basic savings account, it is always worth checking whether you might be eligible for a government-backed scheme with more benefits attached to it.

According to a recent freedom of information (FOI) request submitted by AJ Bell, just 2.5 per cent of those eligible for the Help to Save scheme introduced in 2018 are making use of it.

Open to those who are in receipt of universal credit or working tax credit, the programme allows individuals to pay up to £50 a month into an account, which will then be topped up with a 50 per cent bonus paid after two and four years.

That means someone maxing out their contributions would have a total savings pot of £2,400, which would be turned into £3,600 by the government bonus.

You also don’t have to commit to paying a certain amount each month, and can withdraw the money any time with no penalty (though this will affect how big your bonus will be).

There’s also the Lifetime ISA, which is open to people aged 18 to 40. Savings in these accounts can only be used for a first-time property purchase or for retirement.

The limit on deposits is £4,000 each year until the account-holder turns 50, and the government will add a 25 per cent bonus to savings, up to a maximum of £1,000 a year.

This one has had decent pick-up among eligible savers. “Lifetime ISAs are used very heavily,” says Stuart Belcher, founder of Resolve Financial Solutions. “There’s not many products that will give you 25 per cent off the bat.”

One drawback is that the money can only be used on purchases of property worth up to £450,000.

That means it might not be the right option for those looking to buy in places with high property prices such as London, where the average property price was £547,031 in June, according to Halifax.

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