Saving rates still attractive despite December rate cut
Savers looking for competitive fixed, easy access and regular savings accounts should not be discouraged by the Bank of England's decision to cut interest rates at the beginning of December.
As the credit crunch continues, many banks and building societies are vying for savers money as alternative methods of funding seemingly dry up.
Birmingham Midshires continues to offer the best three-month account on the market, paying 6.98% AER on a minimum £1 deposit. But if you’re after a slightly longer fixed term, Stroud & Swindon Building Society is offering a rate of 6.97% AER until 3 June 2008 for deposits of at least £500.
Or you could opt for Bradford & Bingley’s fixed rate bond which pays 6.80% until 11 February 2009 - you will need to invest at least £1,000 though.
However, if you haven’t yet utilised your £3,000 individual savings account (ISA) allowance for 2007/2008, then consider putting your money into Saffron Building Society’s Mini Cash 180 Day ISA. Paying 6.3% AER on a minimum deposit of £1,000, this type of account ensures your savings are protected from the taxman. Savers do not have to give notice to access their funds, but withdrawals are only permitted via phone or post.
If you need instant access to your funds then opting for an internet savings account could be for you. Newcastle Building Society comes out top paying 6.43% AER on a minimum deposit of £250. Or if you have less money to invest, consider Principality Building Societies e-Saver account which pays 6.3% on a minimum deposit of £1.
Internet banking isn’t for everyone, so if you’d rather manage your money by post or telephone, Heritable Bank pays 6.46% AER on its Easy Access account but you’ll need a minimum deposit of £1,000. An alternative is Anglo Irish Bank’s offer of 6.3% AER for deposit of just £1.
For those committed to making regular savings, Skipton Building Society continues to come out top with its Special Saver account paying 7.55% on contributions between £10 - £250 a month. The downside is you’ll only have access to your funds when the account expires after 12 months.
If you’re a parent looking to set up a savings account for your children, the Halifax one-year Children’s Saver bond continues to outshine its competitors, paying 10% AER on monthly contributions between £10 - £100.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.