You work hard, pay your bills, and even manage to put away a bit of savings for a rainy day (or perhaps a sunny beach). But are you really putting money away? It has been estimated that 80% of all savings accounts in the UK are actually what is known as “Zombie” accounts, paying ultra low interest rates, sometimes as low as 0.1%! And when you compare that pitifully low interest rate to the current CPI inflation rate of 2%, your “savings” may actually be diminishing in value at the rate of 1.5% per year, and could diminish even more as the rate of inflation goes up. The result is that those rainy days seem to loom ever closer, while the sunny beaches grow more distant all the time.
How do the banks get away with this? Quite simple: Most people never even check the interest rate that is paid on their savings, assuming that the advertised rate when they opened their account hasn’t changed. Truth is, those rates change all the time unless you’re in an investment vehicle that pays a fixed interest rate that is guaranteed-in-writing. It’s not in the banks’ best interest to inform you every time their interest rate fluctuates, because they know that if you knew how little interest they’re paying, you’d probably start shopping for a new bank. So they do pretty much what they want with the interest rate, staying within the very liberal boundaries set by government, and count on you to look the other way. So how do you learn whether you’ve got a zombie account, and what do you do if your savings are in a zombie?
Don’t look the other way!
Keep a close eye on the interest your bank is paying. Given the ratios listed above, there’s a good chance that your savings are in a zombie account. Bank is happy, and you might have been as well, at least until you learned how little interest you’re earning. It won’t do any good to get angry at the bank, however. They’re in the business of charging as much interest – and paying as little – as is legally permissible and that their customers will accept. Check the interest rate on your savings account(s) every month, and while you’re at it, check to see what other banks are paying. At the same time, keep your eye on the inflation rate. It’s quite possible that you can find a better deal… unless you just enjoy seeing your savings dwindle, that is.
Open a fixed-rate account.
The best way to avoid surprises is to lock your savings into an account that has a guaranteed minimum interest rate. You’ll have to commit to leaving your savings untouched for a period of time, typically from one to five years, but the difference in earnings can make it quite worthwhile if you can live without the money and avoid the high early withdrawal penalties that are frequently charged. The flip side is that if interest rates trend upward, you could find yourself stuck in a lower-earning account, with the only recourse being an early withdrawal, the penalty for which might eat even deeper into your savings than the zombie did.
Don’t forget the tax man.
No happily ever after story of saving for a rainy day (though the sunny beach is sounding better and better) would be complete without a reminder that part of what the savvy saver earns, the tax man taketh away. You need to take your tax liability into consideration any time you’re figuring how well your nest egg is performing. There are means of deferring the taxes on the interest earned, but sooner or later, the government will want its piece of your pie. The absolute best advice for minimizing the tax bite you will get online is this:
Hire a tax professional.
Any information or advice you get online is going to be very generalised, and might not apply to your situation at all. At worst, following online advice about your financial plans can be dangerous, and there won’t be anyone to speak up in your behalf should questions arise. We’re not in the business of promoting tax professionals, but we know enough to listen to the professionals who know our situation, and to heed their advice.