Savers: Counting the cost of base rate cuts
Friday, 21 November 2008 04:27
If the credit crunch had any silver lining, it was for savers who have been enjoying a summer of high interest rates. A steady base rate of 4.5 per cent combined with banks desperate for cash meant those with money for a rainy day were spoiled for choice.
But as the nights drew in and the Bank of England slashed the base rate down to three per cent, banks and building societies quietly withdrew their headline-grabbing rates.
In these financially uncertain times, there is still a compelling reason to save, however.
And a high interest rate is still important: with the retail price index standing at 4.2 per cent, savers paying basic rate tax still need to be earning interest at 5.25 per cent gross, just to maintain their purchasing power.
Sarah Routledge takes a look at the savings market to find out where savers should be putting their hard-earned cash.
Easy access accounts
Making your cash available at any time and often without penalties, an instant access account is appealing.
Unfortunately, interest rates on easy access accounts were the first to fall after the base rate cut. According to uSwitch.com, 24 savings account providers had cut their rates within ten days.
However, there are still several providers offering accounts above six per cent available.
Alliance & Leicester is offering an eSaver Issue 2 account with a headline interest rate of 6.3 per cent. There is no notice required, however any withdrawals will trigger the loss of any interest earned that month - except for in July, which counts as a 'free' month.
In addition, the interest rate is guaranteed to stay 0.5 per cent above the Bank of England base rate until February 2010.
According to Moneysupermarket.com, several other banks, including ING Direct, Britannia Building Society, Abbey, NatWest and Akbank are all currently offering instant access savings accounts at six per cent interest.
This gives a good spread of accounts to choose from, with a variety of providers. In addition, there are plenty of non-foreign banks in the list, which may be a priority for savers who are feeling cautious about who they give their money to.
However, Louise Bond, personal finance manager at uSwitch.com, said: "For those consumers still looking to make the most of their savings some of the high variable rate accounts may look appealing, but with further base rate cuts predicted these rates certainly won't stay around for long."
Accounts with variable rates can be changed and even if there is a guarantee to remain above the base rate, as with the Alliance & Leicester account, many are predicting the base rate to remain very low for some time for come so this may not be much comfort.
Fixed-rate bonds
In contrast to easy access accounts, these products are generally for those who are happy to 'lock' their money away, from periods of anything between three months and ten years, or even longer.
Although unsuitable for anyone who wants access to their money on a regular basis and often offering a lower interest rate than their easy-access counterparts, these products do have their advantages.
The rate is fixed, which makes it a good bet given most are predicting the Bank of England is planning more base rate cuts in the near future.
And for some the fact that you cannot easily get hold of the cash - with most the account holder stands to lose some or all of the interest paid for an early withdrawal - is an advantage as it can curb the temptation to raid savings.
There are still some deals on the market but the advice is to act fast.
AKBank is offering a 6.3 per cent one-year bond. This is a Dutch bank, but is regulated by the UK Financial Services Authority (FSA).
Kent Reliance Building Society is offering a two-year fixed-rate bond at six per cent, while ICICI Bank, which is based in India but again covered by the FSA, is offering a one-year fixed-rate bond at 5.75 per cent.
ISA
ISAs should always be your first stop for savings, as they are tax-free and therefore usually the best place for your cash, especially if you are a higher-rate taxpayer.
As with taxed accounts, the ones with the highest interest are variable rates, which means they may well fall hard in the next few months.
According to the Financial Services Authority's Money Made Clear website, Kent Reliance Building Society is currently offering the best variable deal at 6.26 per cent, although this is restricted to under 25's.
National Counties has the next best rate at 6.01 per cent, followed by Kent Reliance again at 5.76 per cent.
For those seeking a fixed-term tax-free bond, Nationwide is offering several products at 4.75 per cent.
Fixed or variable?
Although the variable interest-rate saving accounts tend to have the higher initial interest rate, they may not be the best home for your money at the moment, Andrew Hagger of Moneynet.co.uk advises.
"With the next rate cut expected as early as December 4th, savers with funds available to put away for between six months and two years still have time to lock into a decent fixed rate, but only if they're quick off the mark.
"If base rate were to be slashed to one per cent then fixed rate savings products would perhaps offer three per cent or 3.5 per cent gross at best, so if you can tie your money up now and benefit from rates of 5.6 per cent plus, then it's got to be worth pulling out the stops and bagging yourself a piece of the action before it's too late," he concludes.
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