Help for savers as rates remain stuck at rock bottom
The average instant-access account in the UK is paying just 1.03%, the Bank of England announced today.
The Bank's latest "effective interest rates" announcement for March 2013 shows a fall of 0.05 percentage points in the rate paid on instant-access products, from February's 1.08%.
It also said that savers are now getting, on average, a return of just 2.81% on their bank and building society savings accounts.
The news confirms that there has been no let up for the UK's beleaguered savers in recent weeks, as people's savings pots are eaten away by the cost of living.
Inflation currently stands at 2.8%, as measured by the Consumer Prices Index (CPI), and the Bank of England has said it expects it to pass 3% by the end of the year. Moreover, four years after the Bank base rate hit a historic low of 0.5%, some commentators are claiming it could stay there until 2017.
With that in mind, we've looked at the best-paying bank and building society accounts in the UK.
As ISAs are exempt from income tax, savers need only find an account paying 2.8% to beat inflation. For non-ISA accounts, MoneyFacts says a basic-rate taxpayer needs a savings account paying 3.5%, while a higher-rate taxpayer needs an account paying 4.66%.
You will receive better returns if you lock your cash away for a fixed period or commit to saving regularly: a five-year fixed rate bond with Skipton Building Society is paying 3% (minimum investment £500); while a Bank of Scotland monthly saver with a minimum monthly payment of £25 is paying 3.25%.
Back to cash ISAs. The top variable rate ISA without a bonus at the moment is the NS&I Direct ISA paying 2.25% (minimum investment £1), but you will get a better rate if you opt for a fixed-rate product: notably, the five-year bond from Principality, paying 3.10% (minimum investment £500).
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.
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
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.