Savings rates take a tumble

It's still possible to find an inflation-beating return, but you'll need to act quickly, says James Daley
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The Independent Online

Last week's surprise 1.5 percentage-point cut in the Bank of England base rate started to take its toll on Britain's savings rates this week. Worst hit was the fixed-rate bond market, where just days ago it was still possible to get a one-year fixed rate of over 7 per cent. This weekend, the best rates are down at 6 per cent. With inflation still riding at above 5 per cent, it's now very difficult to find a savings account that will even keep pace with the cost of living – once tax has been deducted. With this in mind, it's more important than ever to take full advantage of your £3,600 a year cash ISA limit, as all savings in a cash ISA are free of tax. Even once you've used these allowances up, however, there are still some decent rates to be found among regular accounts.

Fixed rates

The best rates available are currently to be found in fixed-rate bonds – savings accounts where you tie your money up for between one and five years. The best short-term fixed-rate deals on the market are currently offered by the Kent Reliance Building Society, and the Clydesdale Bank, both of which will pay you 6 per cent over the next 12 months. Until Thursday, the Indian bank ICICI was offering 6.6 per cent, but it has now cut this to 5.75 per cent. However, as others cut rates, it may well find itself at the top of the best buy tables again by next weekend.

Although investors might feel concerned about the stability of an Indian bank, there's no need. ICICI has the full protection of the UK Financial Services Compensation Scheme, meaning the first £50,000 of all deposits are 100 per cent guaranteed.

Some fixed-rate bonds will give you access to your money if you desperately need it. However, you will usually forfeit some or all of the interest if you cash in a bond early.

If you're willing to tie your money up for longer, you'll find that the rates are not as good, because interest rates are expected to stay low over the medium term. Clydesdale Bank, however, is still offering 6.1 per cent for three years, which is very good value.

If you do decide that you want to fix your savings rate, don't hang around. With the Bank rate at 3 per cent and expected to fall further, it's possible that the best rates will soon be pulled.

Variable rates

Although many of the more flexible savings accounts are still paying interest rates of over 6 per cent, it's worth remembering that the bank or building society has the right to change its rates at any time.

Michelle Slade of moneyfacts.co.uk, the comparison site, says that anyone looking for a new easy-access savings account should wait a week to see how rates move. "You don't want to be in a position where you open a new account and then your bank cuts rates more than the rest of the market," she says.

Once the dust has settled, however, it's likely that there will still be some good rates on offer. With banks still struggling to raise capital in the money markets, they're working hard to attract money from savers. Over the past few years, the best instant-access savings rates have tended to be no more than one percentage point above the Bank rate, but we're likely to see the best rates stay much higher as long as the credit crunch continues.

National savings

With the Bank of England rate now significantly below the rate of inflation, it is worth considering the index-linked savings certificates offered by National Savings & Investments, the government-owned savings bank. These pay a rate of 1 per cent above the retail prices index, and all returns are tax-free – although you do have to lock up your money for three or five years.

These certificates are among the few products that will guarantee that your savings keep pace with the cost of living. However, now that the oil price has fallen sharply and Britain is entering recession, many economists are predicting that inflation will collapse over the coming months. If that proves to be the case, Clydesdale's three-year bond might be a better option.

Be vigilant

With savings rates changing by the day, it makes sense to use a comparison site such as moneysupermarket.com or moneyfacts.co.uk to search for the best accounts on offer. Watch out for introductory bonus rates, however. Some providers will only pay their high headline rates for a few months before dropping to a lower rate. Also, check to see whether you could be penalised for making withdrawals.

Ultimately – as with all financial products – it's up to you to read the small print before you sign up.

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