After 34 years as a prison officer, Ian Beattie was ready to retire.
When he ended his career in 2022 at the age of 60, he took a tax-free lump sum of £48,000 which, when combined with other savings, gave him £60,000 that he needed to find a home for.
Six years short of his state pension age and having already used most of his £20,000 Isa allowance for that year, he wanted to find a way that his money could generate an income to bolster the £1,400 a month he was getting from his prison service pension.
Beattie, from Grangemouth, Falkirk, stumbled across an article about a technique known as “savings laddering”, where you spread your savings across different accounts with different maturity terms to optimise your interest.
He has since earned more than £3,000 a year — an average return of 5 per cent. Easy-access savings accounts have paid average interest of 2.6 per cent in that time, according to the data firm Moneyfacts.
How it works
The most common form of laddering is where you open accounts with different terms, usually between one and five years. This allows you to benefit from the higher rates offered by longer-term bonds, while not having all your money locked away for years.
It can also be used, like Beattie does, to create a regular income stream by having accounts that mature on a rolling basis.
“My pension and the steady revenue from staggering my interest has helped me to maintain my standard of living throughout retirement so far,” said Beattie, who is now 63.
He uses the savings platform Flagstone, which offers savings accounts from 69 different banks. He started by putting £10,000 in a six-month fixed-term account in October 2022.
Ian Beattie has made £3,000-£3,500 interest from his savings every year since 2022
A month later, he put another £10,000 into another six-month fixed-term account and continued doing the same every six months until all his £60,000 was tucked away earning between £3,000 and £3,500 each year.
“When the first account matured in April 2023, I spent the interest then re-invested the £10,000 into another six-month savings bond,” he said. He has repeated the process every month ever since, sometimes increasing his deposit to £12,000.
Since he started investing in October 2022, rates have been consistently above 5 per cent, with the best one-year fixed savings rate breaching the 6 per cent mark between July and November 2023, according to the Private Office, a financial advice firm.
Rates have now dropped significantly. His six-month accounts pay between 4.06 per cent and 4.35 per cent. He earned about £270 from his most recent six-month bond with ICICI Bank, which had £12,000 in and paid 4.49 per cent, but is happy to stick with his method because it gives him the flexibility of being able to get at large amounts of cash.
“Using this tactic means I’ve still got that initial lump sum and am gaining a good level of interest from it, and if I ever need quick cash, I have £10,000 available every month,” Beattie said.
As a basic-rate taxpayer earning less than £50,270 a year, he gets a £1,000 savings allowance, meaning he can earn £1,000 a year in interest without having to pay 20 per cent tax on it. On interest of £3,000, he would have to pay £400 tax.
A different way up the ladder
Unlike Beattie’s six-month approach, the more common laddering approach involves a cash lump sum being spread across fixed accounts with different term lengths. The idea is that you can get the best rates, while still having access to some of your cash each year.
Often a saver will split a lump sum equally between five fixed-term accounts of different lengths, usually from one to five years. When the one-year bond matures, it is then reinvested into a five-year fixed-term bond, when the two-year bond matures this is then invested in a five-year bond, and so on.
Historically, this tactic was attractive because longer-term savings accounts paid better rates than shorter-term accounts, and laddering meant you didn’t have to lock all your cash away for years.
Lately, however, short-term savings rates have been as good, if not better than longer terms, because of the expectation that rates would fall. This could be about to change, though.
According to the Private Office, the best five-year rate is 4.52 per cent from JN Bank, higher than its one-year fixed rate of 4.43 per cent. The bank also has the best two and three-year fixed-term rates of 4.45 per cent.
In August last year the top one-year fixed rate was 5.25 per cent, while the best five-year fix was 4.4 per cent.
Anna Bowes from the Private Office said: “If these rates continue to converge and five-year rates stay higher than shorter bond term rates, then traditional laddering will become more attractive.”
Beattie, though, is sticking with his six-month deposits, and even trying to encourage others to follow in his footsteps.
“I would recommend this approach to people in my situation. I get access to my money if I need it, it’s safe, it’s giving me a reasonable return, and it’s topping up my pension every month,” he said.