Shelter in a storm

With the markets in turmoil, where can you go to get a good return on your cash? Here and on page 18 we examine the options

THE FIRST requirement of any investment is to beat inflation. If your deposit is not doing this, it is time to switch.

With the stock market shredding the nerves of even the calmest of investors, many are looking to place their funds, at least for the short term, in one of the deposit accounts offering attractive rates of interest, often as much as three times the current low rate of inflation.

Banks and building societies offer a range of monthly income accounts, some with notice periods, others offering competitive rates but with instant access, as well as a range of income-generating bonds.

Postal and telephone-operated accounts tend to offer the best deposit accounts rates, although in many cases you will not be able to use the bank's branch offices or be issued with cash cards. An account paying a monthly income and with rates of more than 7 per cent gross should be easy to find. For the most attractive rates on monthly income accounts, see the table above. Interest paid monthly is often at a slightly lower rate than interest paid annually.

Finding a good rate is only half the struggle. After that you have to keep your wits about you to ensure that your bank or building society does not let rates wither and die in the hope you will not notice.

Obsolete accounts have been the bane of savers' lives for some time but should be squeezed out under a revised Banking Code of Conduct.

Under the code banks must maintain the interest rate on closed accounts at a similar level to that on newer accounts, or give investors the option to switch, says British Bankers Association spokesman Brian Capon.

Banks and building societies do not pay monthly income only from their deposit accounts but also from their investment bonds. These bonds require you to place a lump sum with the bank for a fixed period. The Woolwich Premier Plus two-year bond pays 6.27 per cent gross each month on a pounds 500 investment, 6.78 per cent on pounds 10,000. Alliance & Leicester pays a fixed interest rate of 7.15 per cent gross on its one-year savings bond, from which a monthly income can be drawn. The minimum investment is pounds 1,000. The Halifax Stepped Income Reserve, a fixed-term investment, pays a gross monthly income on investments of above pounds 10,000 of 4.15 per cent in the first year, 4.2 per cent in the second year, then 5.35 per cent, 7.1 per cent and 9.4 per cent in the subsequent three years. A slightly lower rate is available on investments of between pounds 2,000 and pounds 10,000.

Another option for the investor looking for a safe place to put some money but with a guaranteed monthly income is a National Savings Income Bond. For a minimum investment of pounds 2,000 you can receive a variable 7.25 per cent monthly income. Your capital is totally secure and you can cash it in without penalty providing you give three months' notice. For people with more than pounds 25,000 the bond pays 7.5 per cent. Interest on both bonds is paid gross but subject to tax.

Finally, a handful of Tessas allow you to take monthly income. These include Alliance & Leicester, Barclays and Halifax. Tessas' tax-free status makes them attractive to investors and they will retain this benefit under the new individual savings accounts, launched next April. Although you cannot touch the capital in a Tessa until the five-year term is up, you can withdraw most interest. The taxman lets you keep the gross interest, but you can only draw the net equivalent as income, while the remainder stays in your Tessa.

Contacts: Alliance & Leicester, 0800 412 214; Barclays Bank, 0800 400 100; Halifax, 0645 215 216; National Savings, 0645 645 000; Woolwich, 0800 22 22 00.

top five monthly income accounts

Bank/BS Account Notice pounds 5,000 pounds 10,000 pounds 25,000

Alliance & Leicester 60 Direct 60 Day 7.25 7.35 7.45

Bradford & Bingley Direct Notice 30 Day - 7.15 7.30

Cheltenham & Gloucester Instant Transfer Instant 7.25 7.25 7.25

Halifax Premium Direct Instant - 7.25 7.53

Woolwich Direct Access Postal 7.07 7.16 7.25

Gross interest payable. Source: Moneyfacts