There are 261 easy-access savings accounts on the market, according to moneysupermarket.com, the comparison site, but none pays enough to negate the combined effects of inflation and tax.
Savers can seek some respite by investing the maximum allowance in their Isa because any interest earned is tax-free. The cash Isa allowance will increase for everyone from £3,600 to £5,100 on April 6, having already risen for the over-fifties from October. No easy-access Isas provide a real return — the best rate is 2.65% from Standard Life Bank — but you can earn more if you lock in longer.
The top-paying Isa is the five-year fix from Leeds building society at 4.60%, though you run the risk that interest rates will rise during the term. Over shorter periods, you could go for the one-year bond from Aldermore at 3.05% or its two-year bond at 3.6%.
Index-linked savings certificates from National Savings & Investments, the government’s savings arm, also look a more attractive bet following the inflation spike.
The NS&I certificates, which are tax-free and available in three-and five-year terms, pay 1% plus RPI if inflation is positive from one anniversary to the next. At present, this gives tax-free returns of 3.4%, which is equivalent to a gross rate of 5.67% for higher-rate taxpayers and 4.25% for basic-rate ones. Danny Cox at Hargreaves Lansdown, the adviser, said: “They are 100% guaranteed because they are backed by the Treasury and investors can tuck away up to £15,000 in each type of certificate — which gives a total of £60,000 between a couple. The rollover options available at maturity also allow investors to build large, inflation-busting portfolios.”
Tax-free savings and investments also have no impact on age-related personal allowances, which is important for over-65s whose additional personal allowance (£9,490) is reduced by £1 for every £2 of income between £22,900 and £28,930.
Regular savings accounts, which require you to contribute a certain amount each month, often pay more than easy-access accounts. For higher-rate taxpayers, 10 accounts pay interest of more than 4.83% but most require you to have another type of product, such as a current account, with the provider. Basic-rate taxpayers have more choice, with 23 accounts paying a real return, according to David Black at Defaqto, the data firm.
The highest rate on a regular saver that doesn’t require you to have an additional account is from Nottingham building society at 5%, which allows you to deposit £10 to £100 each month. The account, launched last week, is available only in branches.
Finally, savers looking for good rates have to take a gamble on when they think interest rates are going to rise because the best rates are available only if you are prepared to lock away your money. Halifax and Aldermore pay 5.15% on their five-year bonds, with Birmingham Midshires paying 5% on its four-year fix.
Black said: “You should fix only with money you know you are not going to need because early access is either expensive — in the form of penalties — or forbidden.”
The best rate on a one-year bond is from First Save at 3.65%, while ICICI pays 4.25% on its two-year fix.
Some recent key events
• (19 January 09) The PM pumps hundreds of billions of pounds into banks to save the economy. Also, RBS shares collapse following the announcement of a £45bn loss.
• (16 January 09) Anglo Irish Bank was nationalised and its shares suspended.
The background
Following the collapse of the Icelandic banks Kaupthing and Landsbanki, the Government raised the amount of savings protection for individual savers from £35,000 to £50,000 in October last year, which would be paid through the Financial Services Compensation Scheme (FSCS).
Instability has racked the UK banking industry since September 2007 with the nationalisation of Northern Rock, part-nationalisation of Lloyds Banking Group (including HBOS) and RBS, the collapse of Bradford & Bingley and the bailout of Alliance & Leicester by Spanish bank Santander.
Maximum compensation limits (and how to make the most of it)
All of your savings are covered up to £50,000 by the FSCS as long as they are not all held with the same savings compensation licence (see link at the top of the page). The limit on joint accounts is £100,000. These limits do not apply to money held with National Savings & Investments or Northern Rock where all of your money is 100% guaranteed by the Government.
Northern Rock branch and Alistair Darling (insert)
• Foreign banks compensation limits
These limits do not apply if your bank is a foreign bank operating in the UK with a higher compensation limit in its home country. For example, as of September 2008, the deposits of the Post Office and Irish banks operating in the UK such as Anglo-Irish Bank, Allied Irish Bank and Bank of Ireland, are 100% covered following an increase in compensation from the Irish government.
• Essential advice: spread your savings
Due to the rule on different savings accounts with one provider, it is best to spread your savings over as many savings institutions as possible. Yet a series of mergers, takeovers, joint ventures and subsidiaries has created a confusing web for savers to negotiate. And this would have huge implications were your savings provider to go bust. If you had three accounts with the same banking group - which does not have separate compensation licences for each of its brands - instead of getting three compensation claims of £50,000, totalling £150,000, you would only get back £50,000. However, if the bank is separately authorised by the Financial Services Authority, then you would get a separate compensation limit.
• Temporary cover
There were rumours in March 2009 that compensation cover might be extended for those who temporarily have a large cash sum to deposit in a bank account, for example, from the sale of a house. This was said to be in the region of £500,000 and would last for six months, but further details have yet to emerge.
• Confusing banks' compensation licences
On savings, the only confusion from the institutions listed in the bank ownership link above may arise from Sainsbury's Bank, which is 50% owned by HBOS and 50% by J Sainsbury. However, it is still separately authorised to all of the banks in the newly merged Lloyds Banking Group (which merged with HBOS and all of its savings brands, including Bank of Scotland and Birmingham Midshires, on 19 January). HBOS and Lloyds TSB will continue to have separate compensation licences under their merger deal. The bank has promised to notify customers if this changes.