Savings: Stick or twist? Best fixed rate or rising with access?
As interest rates appear to have bottomed out, the only way now is up.
But the dilemma for savers is one of timing: fix now and take the best rates going, or wait until the base rate starts to rise before committing to a long-term deal?
Sarah Routledge looks at the latest instant access and fixed-rate products on the market.
Instant Access
"The problem facing savers is the fact that interest rates have bottomed out at 0.5 per cent, but no one knows just when interest rates will start to rise again," says Sharon Bratley from Fairinvestment.co.uk.
Instant access accounts have lower rates than fixed-rate bonds, but the advantage is that if rates go back up, savers won't be stuck with a suddenly uncompetitive rate.
Fortunately, interest rates on instant-access accounts are starting to creep back up, according to Moneyfacts.co.uk.
Louis Kaszczak, head of Moneyfacts.co.uk, says: "Moneyfacts.co.uk research shows that one in three savers are looking for easy access accounts, so it is a market that providers are wise not to ignore.
"Despite no change in bank base rate, savers are seeing the benefits through increased rates as many providers continue to look to their savings book to fund their lending activities."
Unless you have already used up your £3,600 tax-free ISA allowance for this year, this is the first place you should look for your savings.
Abbey has a Direct Issue ISA 3, which allows transfers in and pays three per cent interest on balances over £9,000. Smaller balances will attract an interest rate of two per cent, with a minimum of £1 needed to operate the account. This account is managed online, by post or over the phone.
If you want to transfer money from another ISA but do not have £9,000, consider Intelligent Finance, which offers a Cash ISA paying 2.75 per cent on all balances, provided you keep at least £1 in there. The account is available by phone and online.
But if you do not need to transfer money from another account, Ing Direct also has an instant-access ISA paying three per cent on balances from £1 up to the maximum of £3,600. The account is also available online and over the phone.
ISA accounts operated online or over the phone, rather than within branches, tend to offer the highest interest rates and the same goes for instant-access accounts.
Provided you are happy to access you account online, Intelligent Finance has recently hiked its rate on iSaver by 1.10 per cent to 2.85 per cent. The account can be opened with just £1, has no short term bonus or withdrawal restrictions and can be topped up online at any time. Intelligent Finance guarantees to pay at least one per cent above the Bank of England's base rate until December 31st 2009.
Principality Building Society has recently re-issued its online only e-Saver, paying 2.85 per cent, including a 1.20 per cent bonus rate. However, the bonus rate is payable after the first 12 months, so you need to keep it open for a year to benefit from the higher rate of interest. But there are no penalties for withdrawal and it can be opened with just £1.
ING Direct offers Direct Savings Account customers a variable rate of 2.75 per cent, which includes a 2.22 per cent gross annual bonus fixed for 12 months. Also available online, there are no penalties or restricting on withdrawing money and an account can be opened with £1.
Fixed-rate bonds
Although all these accounts are far superior to the measly average rate of 0.15 per cent, they are still not among the best savings rates available.
"Instant access accounts allow savers to make the most of increasing interest rates, but in the mean time are offering interest rates that are well below the highs offered by fixed-rate deals at the moment," Ms Bratley explains.
"However, savings providers are starting to recognise this by offering competitive rates on their two-year fixed-rate deals, whereas before the top rates were found on five-year fixed deals."
The top-rate deals require a long-term commitment and a hefty minimum balance, as banks compete to pull in a steady source of income.
Andrew Hagger of Moneynet.co.uk, says: "In the 'post crunch' environment many providers remain eager to attract retail deposits to increase liquidity in their balance sheets and pull in funds to satisfy future borrowing demand.
"Banks and building societies will be hoping that their ultra competitive rates will tempt savers with bigger sums to salt away. The positives for providers are that they should achieve their new balance targets more quickly and via a smaller number of deposits which will reduce administrative costs.
"The downside as far as savers are concerned is that their choice of top paying accounts becomes more limited."
Private bank Rothschild has recently launched Rothschild Reserve Fixed Rate Deposit, which offers a rate of 4.35 per cent fixed for two years. There is a minimum balance of £20,000 required to open this account.
Ruffler Bank is offering Fixed Rate Bonds also at 4.35 per cent, but for five years and for a minimum deposit of £10,000.
"Although this has been an increasing trend over the last few weeks, there are still currently some decent deals available for savers with smaller amounts to put away," Mr Hagger adds.
ICICI Bank UK is also offering 4.35 per cent and requires a minimum deposit of just £1,000 to open a HiSAVE Fixed Rate Account and this is available for two or three years. If you can keep your cash locked away for four years, this account offers a rate of 4.4 per cent.
And Birmingham Midshires is offering a three-year Fixed Rate Bond at 4.35 per cent that can be opened with just £1.
But with the Bank of England interest rate likely to go up over this period, and inflation still potentially posing a threat, is fixing now such a good idea, even if you are taking advantage of these relatively high rates?
Ms Bratley says: "Judging by the market at the moment, a two year fix may be the way to go, as it will take a while for instant access account rates to catch up and it could take at least a year for the Bank of England to start pushing interest rates up.
"However, people should make sure they compare a number of savings account deals before they choose the best one for them," she adds.
You need to consider how much you can afford to lock away, and for how long.
The best rates are reserved for those who have tens of thousands of pounds to invest for a longer time, but ICICI Bank UK is offering a rate of 3.75 per cent for a one-year fix with minimum initial deposit of £1,000, while Birmingham Midshire's two-year Fixed Rate Bond can be opened with as little as £1 and offers 4.25 per cent.
If you do have more to invest, Chesham Building Society is offering a market-leading one-year fixed-rate bond at 3.95 per cent, available to depositors with a minimum of £25,000 to invest.
National Counties Building Society is also offering a high rate for one year with its 35th Issue Savings Bond , at 3.91 per cent, but again you will need to lock away at least £20,000 to access this rate.
Investors should decide what kind of bond is right for them and shop around to find the best rate. But make sure you check that your potential bank or building society is covered by the Financial Services Compensation Scheme (FSCS) and if you have more than £50,000 to invest, it is recommended you hold no more than this amount in any one institution.
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