The fixed-rate savings market has taken a hit following the 1.5% November base rate cut, with deals being pulled left, right and centre. Rebecca Atkinson takes a look fixed deals are left, and at variable rate alternatives.

 

The 150 basis point cut in November came as a surprise to many, with commentators largely expected a 1% chop at the most. While a lot of media attention has focused on what the cut may or may not mean for mortgage borrowers, savers may feel somewhat in the dark about how it will impact them.

Unfortunately, the news is gloomy. Saving rates have been falling back for a while now, for a variety of reasons. These in include less competition (following the fall of several Icelandic-owned saving banks) and cheaper wholesale funding that reduces the need for banks to bring in cash deposits.

But the climate of falling interest rates is now likely to be the biggest factor pushing down saving rates on fixed-rate deals.

According to Moneynet.co.uk, savers paying basic rate tax on their interest will be £12 per annum worse off for each £1,000 held in their savings account as a result of the 150 basis point cut.

Fixed-rate

With interest rates set to fall even further over the next year, experts are
recommending that savers consider opting for a fixed-rate bond where
you can be sure exactly what your rate will be for six months to a
year, or even longer.

The downside of fixed-rate accounts is
that they aren’t designed for people who like to dip in and out of
their savings. Having said that, if you do need to make an emergency
withdrawal or even move all your money, you are (in the main) able to
quickly. Just remember that you will probably lose at least a month’s
worth of interest as a result.

Anglo Irish Bank has, sadly, dropped its two leading fixed-rate bonds that paid up to 7.06% AER. Instead, it now only offers a 12-month deal paying 5.55% AER or a two-year paying 4.6%

One key benefit of Anglo Irish Bank is that it is covered by the Irish government’s guarantee to protect 100% of savers’ money.

ICICI Bank pays a better rate of 5.5% AER on it HiSAVE 12-month fixed-rate deal. The bond requires a £1,000 deposit, and it is available
to both new and existing HiSAVE customers.

This account does allow early access withdrawals, and you can opt for interest to be paid monthly although the rate you'll earn wil drop to 5.37%.

ICICI Bank is fully regulated by the
Financial Services Authority - so you can be sure you’ll get up 100% of
your savings (up to £50,000) back should it go under. However, bear in
mind that is does not subscribe to the Banking Code, which sets a
minimum standard for customer service.

Birmingham Midshires offers a six-month online fixed-rate account paying 5.83% AER on deposit of £1. However, this bond only offers monthly interest so the rate you'll actually earn will be 4.6%. Bear in mind that this account is not available to joint account holders, and withdrawals are not allowed.

if you want to fix for longer, then Birmingham Midshire also offers a 12 month account with an AER of 4.48%.

INSTANT ACCESS

If locking away your money isn’t for you, then a no-notice deal might be more suitable for you.

Scarborough Building Society offers a Balance Builder no-notice savings account that pays 6% AER on deposits of £1. Again, this interest rate is variable but the rate is guaranteed to be at least base rate plus 0.5% until 28 February 2010.

Again, the catch to this account is that just three withdrawals are allowed per year without charge. Further withdrawals will mean a lower interest rate as well as the loss of 28 days of interest.

This account, however, does not allow internet access. If you prefer to manage your money online then an instant access e-saver account might be more suitable for you.

The AA pays 6.46% AER on its internet saver, which can be opened
from £1. However, interest on this deal is paid monthly, so
you'll actually only earn 6.28% interest - plus the rate is variable,
so could decrease in line with the Bank of England base rate. The AA
does allow withdrawals without any loss of interest, but this account
can only be managed online.

NatWest pays 6% AER on its e-Savings account, including a fixed-rate bonus of 2.1% for 12 months. The main interest rate is variable, and could change with base rate, and bear in mind interest is paid monthly so your net rate is actually 4.67%.

On the plus side, this account has no withdrawal penalties.

Both the Egg and NatWest accounts include introductory rates - so after 12 months you'll either have to move your money elsewhere or put up with a lower interest rate.

If you would rather opt for an account that doesn't have any introductory bonuses then Alliance & Leicester offers an eSaver deal that pays 6.3% AER variable – but only if you don’t make any withdrawals. On the plus side, this rate is guaranteed to be at least 0.50% above base rate until 28 February 2010. Plus, this account allows one-off payments whenever you want as well as regular amounts each month.

Just bear in mind, however, that your interest is paid monthly so your net interest rate is actually 6.41%. If you make withdrawals, then no interest is earned in that month except in July, when withdrawals are allowed without loss of interest.

REGULAR SAVINGS

The credit crunch has not only highlighted the importance of saving, it has also created a financial climate where saving products offer better value than in recent years.

Abbey recently launched a regular savings deal paying 8% AER. The First Home Saver account isn't for everyone - it is aimed at non-homeowners aged between 16 to 35 who are able to save between £100 and £300 a month. The minimum deposit is between £100 and £5,000, and the maximum amount you can save is £50,000.

So, what’s the catch? Firstly, this product is limited to first-time buyers, and Abbey is only making 5,000 accounts available through its 701 branches. That's just seven accounts per branch.

Secondly, savers are not able to make any partial withdrawals and any customer who misses a payment or pays in less than £100 one month will see their interest rate drop to 0.1% for that month only.

Thirdly, once the account has been closed, savers must take a mortgage interview with Abbey. However, the bank says there is no obligation for people to take out an Abbey mortgage and there is no penalty if they choose to borrow elsewhere.

Finally, although the account has an attractive AER, it would take 12 years and six months (151 months of payments) to save its maximum balance of £50,000.

Elsewhere, Barclays offers a regular savings account paying 7.75% AER on monthly deposits between £20 and £250. This interest rate is fixed so you can be confident it won’t fall if base rate does.

However, interest is paid monthly so your net interest rate is actually 7.49%. And if you make a withdrawal from this account then your AER will fall to 3.03% (2.99% net) for that month.

After 12 months this account will switch to an instant access account, so you’ll probably want to review at this time.

Abbey also offers a fixed-rate regular savings deal paying 7.23% AER on monthly deposits from £20 to £250.

The downside is you will be penalised for making a withdrawal; if you do dip into your savings, then your rate drops to 6.66% AER for that month. Plus, this account can only be accessed via an Abbey branch.

CHILDREN'S SAVING ACCOUNTS

If you have decided to invest your Child Trust Fund (CTF) voucher into a cash savings account, then the Hanley Economic Building Society currently offers an account paying 7.75% AER which allows you to make additions from £1.

Chorley & District Building Society pays 6.75% AER while, elsewhere, Britannia pays 6.5% AER. However, this latter account includes a 1.25% bonus for 24 months.

If you have already invested your voucher but want to open up a savings account for your child, then Halifax's one-year Regular Saver account pays an impressive 10% AER on deposits from £10.

Elsewhere, Bradford & Bingley pays 6% AER on its three-year children's saving account, on deposits of £100.

More on:

• savings
• interest rates
• FSCS
• Child Trust Funds