Where to find a safe home for your money

Attractive saving rates often come with a sting in the tail. It can pay to play it safe
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The Independent Online

Worried savers can take some comfort from the Government's pledge this week to underwrite £28bn of savings at Northern Rock.

The troubled bank has dominated headlines after falling victim to the worldwide credit crunch which has left banks unwilling to lend to each other and, in Northern Rock's case, forcing it to turn to the Bank of England for emergency funding to prop up its failing finances.

The Chancellor of the Exchequer, Alistair Darling, has also reassured those worried that their bank is at risk of becoming the next casualty of money markets turmoil by promising that the Treasury will financially back any other British bank which finds itself in a similar position to Northern Rock.

But for those doubtful that such a pledge can be 100 per cent cast-iron, there are a range of completely safe, Government-backed savings available through National Savings and Investments (nsandi.com).

NS&I's stated aim is to provide a totally secure place for people to save, backed by the Government. As well as the well-known tax-free premium bonds, NS&I offers a range of saving options, including many with guaranteed returns such as tax-free index-linked savings certificates, fixed-rate savings bonds and pensioners guaranteed income bonds. NS&I index-linked savings certificates allow savers to beat inflation and enjoy a guaranteed return with the added bonus that all returns are tax-free. Maximum purchase is £15,000 and savers can choose to invest for three of five years.

The current rate for both three- and five-year certificates is the Retail Prices Index rate of inflation plus 1.69 per cent for basic rate taxpayers and RPI plus 2.25 per cent for higher rate payers. If you have already used up your annual £7,000 maximum ISA tax-free saving allowance, then NS&I savings can provide a tax-efficient haven for cash investments, particularly attractive to higher rate taxpayers who have to factor in a significant tax take on their returns when weighing up headline rates on taxable saving plans.

Interviews with those queuing outside Northern Rock branches revealed that many savers had large amounts of cash in a single account, some as much as £750,000. If you have a large amount to invest in cash, experts suggest not putting all your nest eggs in one basket: "Do you really want all your cash with one provider or should you consider establishing a mixed portfolio of cash investments?" says Kevin Mountford, head of savings and current accounts at Moneysupermarket.com.

Such a portfolio might include copper-bottomed options from NS&I, other fixed-term savings bonds maturing at different time, as well as easy access savings.

The upside of the credit crunch for those with money to put away is that the recent lack of liquidity in money markets has fuelled a savings war. Financial institutions are unwilling to lend to each other leading banks to look to borrowing from individuals, which has consequently pushed many recent rates to the 7 per cent mark as banks bid to woo savers.

Shopping around using sites such as Moneyfacts.co.uk and Moneysupermarket.com can help savers to source the best rates available, but savings shoppers must remain alert to the tricks used by savings providers to court customers.

Experts say that many of the providers offering the sort of rates that stop savers in their tracks simply cannot afford to sustain their top rates of interest. Charlotte Sjoberg, campaigns manager at Nationwide, says: "Lots of providers are offering whacking great rates, but they are not actually paying them. While they give with one hand, they take with another by structuring accounts in such a complicated way they can easily recoup the money paid out on, say, on initial bonus rates."

Bonus rates are a tactic used to propel accounts to the top of the best buys and may only last months before interest reverts to a much more measly level, meaning savers might have done better by opting for a product with a lower headline rate and better long-term value.

Short-lived inflated bonus rates are just one weapon in the arsenal that savings providers have at their disposal in an apparent fight against transparency. Savers might also find that they can only get the great rate advertised on condition that they keep a minimum balance, or make regular deposits, or have either their mortgage or current account with the same institution. For example, Abbey recently launched a fixed-term savings bond offering a rate of 6.87 per cent AER, but it is only available to new customers if they set up an Abbey savings account to transfer funds from.

A further trend that experts warn consumers to be aware of is "instant access" accounts which are not all they say they are. "If you have to wait two weeks to get hold of your money, then it's hardly an instant access account, but this is just what some so-called 'instant access' accounts require," argues Lisa Taylor of Moneyfacts. And beware that some banks will dock you an entire month's interest if you make a withdrawal.

When looking for the best savings account for you, Mountford advises consumers to arm themselves with a check list of questions: "Do I need access to my cash or is putting it into a fixed rate bond a good idea? What are the penalties if I need to make a withdrawal? Do I want interest paid annually or monthly? What is the long-term or reversionary rate of this product?"

If you do go for something with a strong headline rate that transfers to a stingy default product once the offer period is up, then make a note in your diary to start looking for alternative homes for your cash ahead of when you will start to lose out.

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