Top fixed savings rates now under 4%
The top fixed-rate savings accounts now pay less than 4% AER after the Bank of England cut the base rate by a further 0.5% last week.
The base rate has been cut for five consecutive months now, from 5% in October to 1% in February. As a result, the savings market has undergone a dramatic change; back in October the top-paying fixed-rate deals boasted AERs of 7%, whereas now the top account pays a less impressive 3.9%.
No wonder that the appetite for saving appears to be waning. According to Nationwide, just 46% of people save regularly, 31% save occasionally and 23% save nothing at all.
Andy McQueen, savings director at Nationwide, says: "We are concerned about the number of consumers who are not saving at the moment, as a proportion think that now is a bad time to save.
“We understand that as household finances are stretched, saving can be a challenge but it's never been more important to build up savings to act as a buffer in uncertain times.”
The best savings account for you will depend on your personal circumstances. People keen to get a secure rate of interest that won’t change even if the Bank of England base rate does, might set their sights on a fixed-rate bond. These accounts allow you to lock away a lump sum for six months, a year or longer.
Further deposits are not normally allowed, and making a withdrawal before the end of the fixed-rate period is likely to see your provider cut your interest rate or even close your account.
In a fix: top deals
ICICI Bank is paying 3.9% AER on its HiSAVE 12-month fixed-rate deal. The bond requires a £1,000 deposit but does not allow early access withdrawals.
FirstSave, meanwhile, pays 3.6% AER on its 12-month fixed-rate bond, which requires an initial deposit of at least £1,000. No early withdrawals are permitted.
Coventry Building Society offers an account paying a fixed rate of 3.75% AER until 28 February 2010. You can open this account with just £1,and withdrawals are allowed, subject to 90 days' loss of interest on the amount taken out.
Julian Hodge Bank has re-launched its Capital Millennium Bond with 3.5% AER fixed for 12 months, down from its previous rate of 4.25%. Again, no early withdrawals are allowed.
Birmingham Midshires also pays 3.5% on its 12-month internet account. Access is not permitted and as interest is paid monthly, you’ll actually only earn 2.76% interest.
Finally, SAGA pays 3.45% on its one-year fixed-rate account. You only need £1 to open this deal, but further deposits are not allowed. You are also unable to make any withdrawals from this deal.
Coventry Building Society pays 3.75% on its two- and three-year accounts, which can be opened with upfront deposits of £1. Withdrawals are permitted, subject to 90 days’ loss of interest.
Or Nationwide pays 3.5% on its four-year fixed-rate account. Again, you only need £1 to open this deal – and if you hold £50,000 or more in this account your interest will increase to 3.75%. However, remember under the Financial Services Compensation Scheme you are only protected up to £50,000 per customer per bank.
There are other ways to benefit from the security of a fixed-rate without having to put up with the low interest rates currently available.
Opting for a regular savings deal with a fixed rate of interest is a good way to build up your savings and secure a better rate.
Barclays offers a monthly regular account that pays a fixed rate of 6% AER as long as you deposit between £20 and £250 each month. Although this account does allow withdrawals, you will see your interest rate drop to 3.03% for the month.
Bear in mind that this account pays your interest into a nominated account on a monthly basis, so you won’t benefit from compounded interest. The actual interest you will earn, therefore, is 5.84% (or 2.99% if you make a withdrawal) – which is still better than the top fixed-rate bonds.
Principality also offers a fixed-rate regular savings account with an AER of 5%. You must pay in between £20 and £500 a month, and no withdrawals are allowed.
Be aware that if you miss a payment, Principality will move your money into an instant access account with a bottom tier rate of interest for the full 12 months.
Finally, Abbey’s fixed monthly saver account pays 4.49% AER on monthly deposits between £20 and £250. No withdrawals are allowed, and if you miss a payment you’ll earn just 0.1% AER for that month only.
If you haven’t yet used your 2007/08 ISA allowance then there is still time to put up to £3,600 away in a tax-free savings account.
Halifax offers the top fixed-rate cash ISA, paying 4% AER on its four-year bond. You need to have at least £500 to open this ISA, but bear in mind that further deposits are not permitted. Halifax allows you to transfer previous ISA savings into this account.
However, if you don’t want to tie your money up for four years, then the Dunfermline Building Society pays 3.75% AER until 31 October 2011 on its fixed-rate ISA. You need £100 to open this account, and further deposits are permitted. However, transfers of old ISAs are not allowed.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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.
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.