Find a savings account to satisfy your needs
Q: I have a savings account with ING, which started at a really good rate but has now gone down to 0.5%.
I need to withdraw money from it every November to pay caravan site fees, so I want to put the money into an account where I get a good rate of interest but don't get penalised for withdrawing money. Can you help?
A: Philip Pearson is a partner at P&P Invest in Southampton
For the past two-and-a-half years, interest rates for savers have been on a downward trend and they are now at rock bottom. Unfortunately there is no expectation of any improvement for some time.
You are certainly not alone in discovering that a deposit account that once provided an attractive rate of interest is now paying less than 1%.
Unfortunately, it is common practice for banks to entice savers in with an initially good level of interest then slash this rate in due course - hopefully without them noticing. It's a good idea to compare savings rates on a regular basis to ensure that you are getting the most competitive terms.
It makes sense also to obtain interest free of tax and this can be achieved by using your cash ISA allowance. Up to £5,340 in the current financial year can be invested with the interest paid tax-free.
The most competitive rate presently available is from the AA Internet Access ISA (minimum deposit £500), which pays 3.5% and allows unlimited access to your money. This includes a 1.35% bonus that ends after 12 months. It is worth remembering the interest rate is variable and could reduce at any time.
An alternative approach would be to select a fixed rate of interest for a 12-month period - either in an ISA wrapper or using a fixed-rate bond. You mention you'd need to access your savings each November, so you could time the opening of a fixed-rate one-year account or ISA to coincide with this.
That way you could benefit from a guaranteed higher rate, without suffering penalties for withdrawing your money.
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.