With the roll call of failed banks increasing by the day, cash is no longer perceived as quite the safe haven it once was. However, if you have your money with a government-backed institution such as National Savings and Investments or Northern Rock then this is as safe as it gets.
The important thing is to make sure that your money isn't losing value. With Retail Prices Index inflation at 4.8 per cent, a basic-rate taxpayer needs an interest rate on their savings of 6 per cent and a higher rate taxpayer needs to achieve 8 per cent just to make sure their money treads water.
Although there are plenty of good rates available, as banks are extremely keen to raise capital, you won't find 8 per cent on a taxable savings account. You need to invest tax-free to beat inflation.
Cash Isas are a good option, though you're limited to putting £3,600 per tax year, and if you've already used your stocks and shares Isa limit of £7,200, this isn't an option for you. The best cash Isas for new money is from Barclays (6.25 per cent), and there are some higher rates available for transfers.
A good alternative, particularly for higher-rate taxpayers, are the tax-free index-linked savings certificates from National Savings and Investments, which guarantee that you’ll beat inflation. These offer a return guaranteed to beat the Retail Prices Index by 1 per cent a year (equivalent to a return of 9.7 per cent for a higher-rate taxpayer). You can invest £15,000 per issue with a choice of 3 and 5 year terms.
On taxable accounts, if you can lock your money up for a year, there are plenty of bonds offering more than 7 per cent. Anglo Irish Bank, which is fully guaranteed by the Irish Government is offering 7.05 per cent on its one year bond. You can get slightly more on one year bonds from Saga, ICICI Bank and the AA.
For ultimate security, National Savings and Investments has an easy access savings accounts offering 4.20 per cent on deposits greater than £50,000. Smaller deposits are subject to tiered rates starting at 3.15 per cent for £1,000 to £4,999.
Northern Rock's easy access internet account is currently unavailable to new customers (though will reopen soon) and its other current account only offers 0.10 per cent interest. However, it has some decent cash Isas and an uncompetitive fixed rate bond at 4.5 per cent.
Apart from Northern Rock, NS&I and the Irish banks, make sure that you don't put more than £50,000 with any banking organisation, as this is the maximum limit for compensation under the Financial Services Compensation Scheme if a bank goes bust (see )
Holding large amounts of cash at the bank is not your only option. Money market funds, such as the Fidelity Cash Fund, which invest in cash equivalents such as government bonds and commercial paper, are a good alternative. These are arguably more secure than a cash account as they diversify across lots of institutions and they are also very liquid - you can cash in your investment any time if you think it is a good moment to increase your share holdings.
Moneyfacts.co.uk provides the IC's savings rates tables - see www.investorschronicle.co.uk/ResearchTools
