Three good homes for your savings

This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense

As the economy continues to stumble and banks make loans tougher to come by, much of the advice being doled out in the financial press tends to focus on the plight of borrowers. They are finding that the best mortgage deals can disappear literally overnight as lenders become increasingly risk-averse. Only last week for example, I tipped First Direct's 4.95% two-year deal in Money Sense, only to see them "temporarily withdraw" it a day later!

However, tricky though times have undoubtedly become for borrowers, the current environment is also a challenge for savers. Although Mervyn King's brief at the Bank of England is to tame CPI inflation, which is already running above target at 2.5%, he will almost certainly bow to pressure from banks and house builders pretty soon to cut rates. This means that savers need to be on their toes to ensure that their hard-earned cash still generates a decent return.

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This isn't as hard as it sounds partly because having lent unwisely for so long and then got burnt by the credit crunch, many banks and building societies are anxious to restock their funds by attracting your cash. Here are three ways you can put your money to work.

Helping your kids

As Myra Butterworth reminds us in The Telegraph, cash Child Trust Funds currently offer some pretty tempting rates. The way these work is the government provides the first £250 voucher to the parent of any child receiving child benefit and born after 1st September 2002. You then decide where to invest it for your child and thereafter you, another member of the family, or even a friend, can invest up to another £1,200 per year on their behalf, all of which earns tax free interest from then on until the age of 18 when the fund either closes or is transferred into an ISA. Just now, as moneyfacts.co.uk reveals, some of the best accounts for example with the Hanley Economic Building Society pay up to 8% gross interest.

Another nice little boost for kids comes from KidStart. The idea is you click on KidStart before doing your weekly online shopping with a retailer such as Tesco or Marks and Spencer and they then rebate an amount, based on the total shopping bill, into a nominated child trust fund or savings account. With M&S for example, the 4% rebate on offer is worth around £208 a year on spending of £100 per week. Clearly the retailers are primarily motivated by securing your custom, rather than helping your kids, but it still makes financial sense to check whether the shops you use regularly are part of the scheme.

Helping strangers

If you are feeling philanthropic then using the website Zopa.com you can lend money directly to needy borrowers and earn what they claim is an average of 7%, rising to 8% or even 10% depending on the risk profile of the borrower and the amount of the loan anything between £10 and £1m. Zopa describes itself, somewhat immodestly, as the "eBay of the banking world" which means they essentially cut out banks and link willing lenders to borrowers for personal loans, a concept that consultancy Gartner reckon could account for 10% of the market as soon as 2010.

Clearly some of the high returns on offer reflect the fact that lending to an individual is less secure than lending to a bank, but set against that, Zopa impose stringent credit checks on borrowers and distribute your cash between at least 50 of them to minimise the impact of a default. Also you get a say in the level of risk you take from "A", low risk, to "C" higher risk. The annual fee - 0.5% of the amount lent - eats into returns slightly and you don't have the backing of the Financial Services Compensation Scheme should your borrowers not pay up, but with a claimed default rate of less than 0.1% this shouldn't be a huge barrier.

Helping yourself

If neither of those options appeals then there are some decent 6% plus bonds around, although if you want one, it may pay to get your skates on given the likelihood of Bank of England rate cuts. For the truly long-term investor, Birmingham Midshires have broken the mould with a deal at a fixed 6% gross to lock your cash away for ten years, or 5.85% should you want monthly income over the same term.

For those with a shorter-term time horizon, Bradford and Bingley is due to launch a 6-month bond tomorrow morning paying 6.7% gross, and at the same time Newcastle building society will launch a bond for one year paying 6.45% gross according to moneyfacts.co.uk. In both cases we recommend you limit any investment to £35,000, the amount covered fully by the Financial Services Compensation Scheme.

Alternatively you could leave your money for either three or five years with the government via the National Savings index-linked certificates, which offer a tax-free rate of 0.25% and 0.35% respectively over the retail price index (RPI). With the RPI at 4.1%, that's the equivalent currently of a gross rate of around 7.3% earned elsewhere for a higher rate taxpayer. And the government won't go bust.

Happy saving!

Merryn Somerset Webb is away.

This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense