Diminishing returns for savers

The National Savings movement has flagged a further reduction in savings rates, in spite of the signals coming out of the Bank of England that interest rates will need to rise over the next two years.

The rate on First Option Bonds has been cut immediately from 6.25 per cent to 6 per cent gross, although the bonus for amounts over pounds 20,000 remains at 0.25 per cent.

The rate paid on Income Bonds comes down from 6.25 per cent to 6 per cent from the end of August, and interest on Investment Accounts has also been scaled down by 0.25 per cent to 4.75 per cent on amounts under pounds 500 and 5.25 per cent on sums up to pounds 25,000.

The reductions reflect the fall in yields on gilt-edged stock following the last cut in base rates, but there have been two cuts in base rates since National Savings rates were last changed in January, Angela Knight, Economic Secretary to the Treasury, explains.

Bond rates have also been drifting downwards in the last few weeks, but have now steadied, according to Baronworth Investment Services, and no major downward changes are anticipated in the near future.

The best one-year rate on amounts under pounds 3,000 is 3.05 per cent from Premium Life, and on up to pounds 5,000 4.62 per cent from Pinnacle Insurance. Over pounds 10,000 the best is 4.73 per cent from AIG.

Rates improve on investments over two years, with Premium Life paying 4.2 per cent gross on amounts from pounds 1,000 up to pounds 3,000 and Pinnacle Insurance paying the best rate of 5.67 per cent on sums from pounds 3,000 to pounds 50,000. Over three years Premium Life again makes the best offer on small sums, at 4.8 per cent up to pounds 3,000, while ITT London & Edinburgh is best on amounts up to pounds 10,000, paying 6.03 per cent.

Over five years the best is 5.55 per cent up to pounds 3,000 from Premium Life, and Pinnacle offers 6.6 per cent up to pounds 10,000 rising to 6.65 per cent up to pounds 50,000.

Portman Building Society is cutting interest on its instant access account to 4.5 per cent gross from Monday, the first reduction in seven months, but it remains the best paying "genuine" instant account in the top 20, with a minimum balance of only pounds 100. Portman's One Year Bond, paying 6 per cent gross on as little as pounds 500, will remain on offer until the end of the month.