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.