If you doubt this, then figure it out for yourself. Put pounds 10,000 into Abbey National's Instant Plus Account, paying monthly interest of just 1 per cent gross. After deducting 20 per cent basic rate income tax, the net annual return on this account would be pounds 80.
The underlying rate of inflation - excluding house prices - fell to 2.5 per cent in August. Apply this over 12 months, add net interest, and the real value of cash would be around pounds 9,830. On these figures, basic rate taxpayers need gross returns of at least 3.1 per cent just to level peg with inflation.
One way to get higher interest is by putting your cash in a "variable term account". Check on whether interest is credited to the account on a monthly, quarterly or annual basis.
As an example, take Bradford & Bingley's Bonus 120 account, which pays annual interest of 7.4 gross, and a lower 7.2 per cent if paying monthly on a deposit of pounds 10,000. There are penalties for early withdrawal.
But Jeremy Peat, chief accountant of the Royal Bank of Scotland warns: "Interest rates could go lower, faster, than has yet been factored in by the markets." If you're relying on interest to supplement income, looking at fixed rate accounts seems a sensible precaution.
Northern Rock has some of the best deals on one-year fixed-rate bonds; pounds 10,000 will lock into a fixed gross rate of 7.05 per cent paid monthly. Non-taxpayers investing this amount receive pounds 58.75 a month, low rate taxpayers pounds 47 a month or 5.64 per cent net, and high rate payers, pounds 35.35 a month, or 4.18 per cent net.
But caution is needed. Monthly interest bonds pay less - between 0.2 and 0.5 per cent - than quarterly or annual bonds. No early access to capital is allowed.
Bonds of this kind are available from banks and building societies. Some insurance companies offer "guaranteed income bonds"(GIB's).
The big drawback of GIB's is that they only pay "income" net of basic rate tax. This is not reclaimable even by non taxpayers. Investing pounds 10,000 for one year, the best net return comes from GE Financial Assurance, paying 5.16 net monthly. Over three and four years Hambro Assured offers respective rates of 4.90 and 5.10.
Some local authorities issue fixed-rate term bonds. These are similar to fixed-rate bonds,with no early access. Over one year, Torfaen BC comes top, paying 6.25 gross on a six-monthly basis, on deposits of pounds 1,000 or more.
You can also try "moneymarket time deposits". The current best deal comes from Anglo Irish Bankcorp, offering a fixed rate of 6.5 per cent over 12 months on deposits of pounds 50,000 or more.
Remember the effect of inflation on your capital. At 2.5 per cent, inflation would reduce the value of pounds 10,000 to just pounds 8,750 over five years.Reuse content