Savers told to act fast as rates descend from the heights

Products are being repriced after the 1.5 per cent cut, but banks are still eager to get their hands on our cash
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The Independent Online

With interest rates tumbling, savers need to look harder than ever for a good deal. The recent 1.5 per cent base-rate cut by the Bank of England caught banks and building societies alike on the hop, and when financial firms are surprised, their first instinct is to raise the draw bridge. On this occasion, the result was a moratorium on savings products as banks and building societies looked to reprice their offerings, fearing that the rates they were paying were out of kilter with the new, lower-interest-rate world brought about by the Bank's shock move.

However, the "closed" sign that went up on savings – 24 providers pulled their products out in the 24 hours after the Bank of England's announcement – was only a temporary move. Banks and building societies still need savers' cash to shore up their balance sheets and some are prepared to pay over the odds for it.

And while the 7 per cent interest rate is now long gone, David Kuo, from financial advice website, says it's still not too late to get a good deal. "The message is that the banks still want your cash, and the longer they get to hold on to it, the better for them. This means that despite the turmoil of the past week or so, fixed-rate deals that tie their customers in for a specific period (usually a year) remain competitive," he explains. "But if you want the very best rates, you have to move now as repricing is still going on."

But memories of the collapse of the Icelandic banks are still sharp among UK consumers. No wonder many savers are cautious about where they put their money; not only do they want a good rate of return but they also need to feel sure their cash will be safe.

"Don't put your eggs in one basket," advises Mr Kuo, even if you are below the £50,000 limit under which savings are guaranteed by the Financial Services Compensation Scheme. "Spread your money between different accounts – say four or five different providers. A number are offering around 6 per cent a year."

Fixed-rate deals will appeal to savers who want a guaranteed return. The disadvantage is that the money can't be withdrawn for a minimum period, usually a year. Should you need to get your cash in a hurry, some providers will be flexible and allow you to take money out early, but this will usually result in losing interest. "If you can, it's great to fix, but if you need access to the money then fixed rates aren't the way to go," says Michelle Slade from financial information service "Most of the fixed-rate accounts are 'no access', and while some do permit it, there is a loss of money and you can't top up."

Before thinking about whether or not to fix, Ms Slade says savers should look at the tax position of the deals on offer. "The first thing is to make sure you use up your cash individual savings account [ISA] allowance. You can save up to £3,600 a year tax-free in a cash ISA. That's a huge boost to the real rate of return."

The best of both worlds, she adds, would be to plough money into a fixed- rate account that enjoys ISA status. She recommends the Bradford & Bingley one-year fixed-rate ISA paying 6.25 per cent. This equates to a return of around 10 per cent a year for a higher-rate taxpayer.

But there is a large caveat: with unemployment increasing sharply, is this really a good time to be tying money up that may be needed should the worst happen to your job? "Have a look at your monthly household bud-get – at your spending and what you are earning; the difference between the two is what you can save," says Mr Kuo. "To prepare for events like redundancy or rises in utility bills, keep three months' worth of expenses in an easy access savings account. If you do lose your job, you will have money until you find your next one.

"Act today rather than tomorrow if you have got the money. No one knows what's going to happen next month, let alone next week."

The best-buy tables in the instant access account market are dominated by the building societies. The Newcastle Building Society is paying 6 per cent on a minimum £3,000 deposit in a cash ISA instant access account, while Market Harborough Building Society is paying 5.85 per cent. However, both include introductory bonuses. The Kent Reliance Building Society Direct Variable Rate ISA is paying 5.76 per cent on deposits of over £1 but crucially there is no introductory bonus.

Those worried by the effects of inflation – still running at around 5 per cent despite the falling oil price - could consider savings deals that are pegged at or above the retail price index (RPI).

The most high-profile and popular of these are index-linked savings certificates from National Savings & Investments (NS&I). These accounts promise to pay interest above the RPI if you agree to tie your money up for a three- or for a five-year term. As with ISAs, returns are tax free.

However, the connection with inflation may not be as lucrative as it currently seems.

Retail prices are now rising by nearly 5 per cent a year. Combined with the additional interest paid and their tax free status, this equates to a total return of around 10 per cent for higher-rate taxpayers. But these golden days of near-double-digit returns are set to end, with the Bank of England predicting last week that inflation could be around 1 per cent by 2010. That will make the returns on NS&I savings certificates look much more anaemic.

By then, however, many bank and building society interest rates, even on fixed-rate accounts, may be much lower than they are currently.

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