While the Bank of England's interest rate slash might have made life easier for mortgage borrowers, savers have been left with the short end of the stick. But while attractive rates might be in short supply, there are still ways of ensuring you get the most income from your savings account.
Read the fine print
As interest rates plummeted, banks responded by reducing interest payments on accounts, however some have left minimum deposit levels as they were, or have recently hiked up these levels. Savings accounts such as Allied Irish Bank's Optimum Access require customers to deposit £50,000 to earn a paltry 0.5 per cent interest, while the Bank of Scotland pays 0.25 per cent on its International Base Rate Tracker, which requires a minimum investment of $50,000.
Apart from making sure what the minimum initial investment is, you also need to be wary not to get locked into a product. Peter McGahan, managing director of independent financial adviser (IFA) Worldwide Finance, says investors often get sucked into flashy headline rates. "This is a favourite trick of providers to buy in money from investors and within no time the rate plummets.
"If you are planning to go for a mouth-watering rate make sure you do not invest into an account with an exit penalty as this is a common approach to locking you in."
Some offerings are also dependent upon opening a current account with the same lender.
Different strokes…
For those wary of being locked into a product, an instant access savings account will allow you immediate access to your cash. Some of the more attractive 'instant access' rates on offer are Yorkshire Building Society's Internet Saver and Norwich & Peterborough's E-Saver 2, both which offer an interest rate of 2.75 per cent for an investment between £1 and £1m.
Typically, many of the best instant access accounts are with internet-only banks but be warned that it might take a few days to transfer cash from these accounts to your current account.
An alternative is the 'notice account', a variable interest rate account usually offering more attractive rates than an instant access account, but where you have to give notice to the bank if you want to make a withdrawal.
A fixed term savings account such as Halifax's Fixed rate Web Saver account, will offer you more attractive interest rates, but at the expense of locking your money away for a given time period. Investors putting away £500+ for one year with this account can count on a rate of 3.40 per cent.
Another type of savings account is the 'bonus account' which pays investors a bonus for the first 12 months.
Investors need to be wary of bonus rates, as best buy tables from savings comparison sites often include the bonus into the interest rate quoted - giving a skewed picture of what rate you can expect to get long term. That said, there are attractive offerings in this space with Bradford & Bingley's eSavings 7 account offering a rate of 3 per cent (including 1.40 per cent bonus for 12 months) for a minimum investment of £1,000.
Importance of Isas
Using a tax-free cash Individual Savings Account (Isa) where you can will help bump up the level of income you receive. First, interest will be paid free of 20 per cent savings tax. Second, Isa accounts tend to pay higher interest rates than other accounts.
Top Isa rates include the 'Golden Isa' from Barclays, paying 3.55 per cent on £1 (note that the rate includes a 1 per cent bonus for 12 months) and Natwest's Cash Isa Plus which pays 3.45 per cent.
TABLE: Best internet savings accounts
| Company | Account | Gross | AER | Notice or Term | Deposit |
|---|---|---|---|---|---|
| Yorkshire Building Society | Internet Saver | 2.75% | 2.75% | Instant | £1 |
| Barnsley Building Society | e-save | 2.75% | 2.75% | None | £1 |
| AA | AA Internet Saver | 2.53% | 2.56% | None | £1 |
| ICICI Bank UK | HiSAVE Savings | 2.45% | 2.45% | None | £1 |
| Newcastle Building Society | NewcastleNet Savings Issue 7 | 2.34% | 2.34% | None | £250 |
| Birmingham Midshires | e-Saver Issue 2 | 2.33% | 2.36% | None | £1 |
Source: Moneyfacts (23 03 09)
