Currently inflation is running at around 4%. Savers must earn more than this or the cost of living will erode the value of their cash - and that's before tax. Someone in the higher-rate tax band has to earn at least 8% before tax to generate a positive real rate of return, while people in the basic-rate tax bracket need at least 6%. Currently most easy-access savings account are paying less than 6% meaning that taxpayers are actually losing money.
An answer to this is to wrap up your savings in an ISA tax-free wrapper. This allows you to put away £3000 into a savings account in a year and any gains will be tax-free, making your return inflation-diluted only. But this still only means a real return of only 3% maximum, and a £3000 limit too.
National Savings & Investments, the government-backed agency, offer various savings and investment vehicles that have a special tax-free status (no income tax, no capital gains tax). The best return is provided by their 3 year and 5 year index-linked savings certificates, that pay Retail Price Inflation plus 1.35% fixed for 3 or 5 years (ensuring your money is always making a positive real return). That currently equates to 5.75% which isn't far off the leading savings rates out there. Your money is tied up for the 3 or 5 year term - but the gains are completely tax free. You can invest up to £15,000 per year in each certificate, giving you a tax-free annual option of £30,000, assuming you have already used your ISA allowance. Anyone aged 7 or over can invest, but they can also be bought on behalf of under-7s by parents.
Got a child under 16? Get a market-beating 10% AER interest with Halifax's Childrens Regular Saving Account. Open an account in your name on behalf of the child and pay in between £10 and £100 each month for 12 months. No withdrawals are permitted until the 12 months are up, at which point the balance will be transfered to an alternative Halifax savings account that you select up front. Choose the Save4it account, which has no withdrawal restrictions, pays a good 6.05% AER and gets you a couple of freebies on opening: a free calculator and coin bank. Once your cash moves into the Save4it account, you could withdraw the full balance and close if you wish.
For maximum benefit pay in the upper limit of £100 a month (pay by standing order / direct debit because if you miss a payment the 10% interest is foregone), and to double up open an account in your partner's name on behalf of the child too. The child can have multiple accounts on their behalf, as long as the applicant differs each time.
Investments
The real money is to be made in shares and funds, rather than savings accounts. After all, when you give your money to the savings bank, they put it to work in stocks and other investments, make a handsome return then pay you a comparatively paltry interest rate. Claim the real gains for yourself.
An ISA incorporating funds and/or shares has a larger £7200 limit than a cash ISA (you can't do both in one year), and on top of that you are allowed £9600 in tax-free capital gains per year. You are free to invest in shares, indexes, commodities, precious metals, currencies, property funds and more. Full details on the Shares and Funds page here.
Dormant Cash and Lost Assets
More than £300 million is lying dormant in forgotten-about cash, savings and investment accounts. The Government is making plans to grab any that has been dormant for over 15 years, and is likely to implement this in 2009. If you potentially could you have a claim on any of this money, now is the time to act.
People often lose track of savings because they fail to pass on their new address when moving house - have you moved house in the last 15 years? Search your house and possessions for old passbooks and the like - if you find such documents take them in to the bank or building society with proof of your new address. If you recall you did have an account but can't remember the specifc bank or building society then contact the British Bankers' Association or the Building Societies Association.
Other account holders have died leaving their heirs unaware of their accounts or even that they can claim the money - have you experienced the death of a parent or spouse in the last 15 years? If you find account details for a dead family member then you need to take a copy of the statutory declaration or probate form when you claim the money.
You may be aware of other 'lost' assets. Try here for lost NS&I bonds, certificates or accounts, here for a lost pension, here for lost insurance policies and here for lost unit trusts.