Why short-term savings are a wise move
Anyone looking for a new home for their savings will no doubt be tempted by some of the great best-buy rates on offer at the moment.
These are almost exclusively being offered to savers who are prepared to lock their money away in a fixed-rate account. But the amount of time you have to tie your money up for may well put you off.
Deciding whether to opt for a long-term fixed-rate account or not will depend on your view on the outlook for the Bank of England base rate. This has been held at 0.5% for four months in a row, following six months of cuts. Because the official rate of interest cannot turn negative, the next move the Bank of England makes is likely to be an increase – but the question is, when will this happen?
Unfortunately, without the aid of a crystal ball it’s impossible to say for sure. Some economists expect the base rate to start to slowly increase before 2009 is out, while others don’t think there will be any change until next year.
Benjamin Williamson, an economist at the Centre for Economic Business Research, says: “We expect that it will take until the first half of 2010 before base rates can be raised.”
Once the base rate starts to increase, new savings deals are likely to get even more attractive. The problem with opting for a long-term fixed-rate account now is that you could miss out on these, because your money has been tied up for two, three, four or even five years.
You therefore have two main choices; you can either opt for an instant savings account and move your money when you see a fixed deal you like the look of, or you can keep it in a shorter-term fixed account.
Instant access deals
When it comes to instant access deals, there are three important things to bear in mind. First of all, these nearly always pay variable-rate interest, so the AER you receive when you first take out an account could change down the line.
Secondly, look out for withdrawal restrictions – some providers only allow you to make a certain number of withdrawals each year, or hit you with a penalty for trying to access your cash.
Finally, many of the best deals include introductory bonus rates. Make a note in your diary of when these end, and make sure you look for a new home for your money or risk seeing your returns shrink overnight.
Alliance & Leicester offers one of the most attractive instant access deals; its online account pays 3.15%, including a bonus of up to 2.65% until 2 August 2010.
There are no withdrawal restrictions, so you can access your money without being hit with a penalty or loss of interest, and you can save between £1 and £2 million in this account.
Bear in mind, however, that this bonus is tiered - this means that you will earn a total return of 3.15% until August 2010 as long as you have at least £1 in your account - however, the higher the balance, the lower the bonus you earn.
Birmingham Midshires, meanwhile, offers a telephone savings account paying 3.15% on deposits from £1. This deal allows unlimited and penalty-free withdrawals, but rate includes a bonus of 2.65% for the first 12 months.
ING Direct now pays 3% AER (up from 2.75%) on its variable-rate savings account. You can open this deal from as little as £1, and there are no penalties or restrictions when it comes to accessing your money. This deal is only for new customers – and bear in mind that after one year the rate will fall to just 0.5%.
Finally, Sainsbury's Bank has an internet savings account that pays 2.8% AER on deposits between £1,000 and £500,000. However, you are only allowed to make three withdrawals during the first 12 months, and after this time the rate will drop to just 0.75%.
Short-term fixed rates
The instant access accounts above are really only worth sticking with for a year, as their rates will decrease once their introductory bonuses run out. The good thing about them is that if you decide to move your money during this time (into your current account for a large purchase or emergency, or you decide to take advantage of a fixed-rate) then you can do so without any penalty.
On the downside, the rates advertised when you open one of these accounts might change within that period.
In contrast, with a short-term fixed rate you can be sure that your rate won’t change during the term. However, try and access your cash, and you’re likely to lose the interest accrued.
Derbyshire Building Society pays 3.75% AER until 31 August 2010 on deposits of £100. You can apply in branch, online or by post for this account, but withdrawals are not permitted and the society may also restrict further deposits down the line.
Cheshire Building Society also has a one-year fixed-rate account paying 3.75%, but this time on deposits from £1,000. No withdrawals or additional deposits are permitted during the 12-month term. Access is only via post or branch.
Abbey also pays 3.75% AER on its one-year account, but you’ll need a whopping £25,000 to put down. You can’t make withdrawals or further deposits.
If you’re willing to lock your money away for a little bit longer, Abbey pays a slightly more generous 4% of its 18-month bond.
Principality Building Society has launched a range of fixed rate bonds paying up to 5.1%. You can choose from a six-month account, paying 2.52% AER, a one-year deal paying 3.50% AER, a two-year account paying 4.00% AER, and a five-year deal paying 5.10% AER.
All of these deals require a £500 upfront deposit, other than the five-year fix which can only be opened with a deposit of £5,000.
ICICI Bank has a one-year account paying 3.45% AER, and you need £1,000 to deposit upfront. No additional deposits or withdrawals are allowed.
Halifax offers a one-year account paying 2.5% AER on deposits from £1, and you are permitted to make four withdrawals during the 12-month term.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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.
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.
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