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It is two weeks since the Bank of England cut the base rate cut to a record low of 1.5%, leaving many savers struggling to earn a return on their cash.
With the average rate on an instant easy access account standing at 1.46% (on a balance of £1,000), and nearly 50 savings accounts on the market paying just 0.1% interest, the outlook remains bleak despite some new accounts launching this week.
"Unless you have a large sum of money, it's not really worth leaving your money sitting in a savings account which is only earning as little as 0.5%," says Andrew Hagger of price comparison site Moneynet.co.uk. "On £500 you would only have earned £2.50 in interest after a year - and 50p of that would have gone to the tax man. In this scenario, it would be much more beneficial to use that money to clear off any credit card debt, as while the base rate has come down, borrowing rates on credit cards remain high."
Inflation struggle
Consumer price inflation dropped sharply to 3.1% earlier this week, but even at this lower rate there are very few savings accounts on the market offering a real return to taxpayers. Accounts paying the lowest amounts of interest include the Halifax variable rate Isa, which pays 0.61% interest, and Nationwide's Cashbuilder account, which pays just 0.1% interest.
Money saved in a Isa is not subject to tax, so interest of more than 3.1% outstrips inflation, but outside a tax-free savings account you need to earn more to get a real return. A higher-rate taxpayer now requires a gross return of 5.17% to stop the value of their savings from dropping, while a basic rate taxpayer requires 3.88%.
Unfortunately it is not very easy to find those kind of returns any more – so where should you put your cash?
Cash Isas
Marks & Spencer today launched the Advantage Cash Isa, which pays a variable rate currently at 3.1% (including a 1% bonus until April 2010) on a minimum opening balance of £100. The Advantage Isa accepts transfers in from other Isa providers. There is also the option to fix the rate to secure a guaranteed return at either 2.5% for one year and 2.75% for two or three years, or you can "mix and match" completely and put some money in the variable instant access part of the account and some in the fixed-rate account.
It is hardly inflation-busting, but should offer a real return if inflation starts to fall. David Black, principal consultant for banking at financial research company Defaqto, says: "If you look at how low base rate is, then these are actually a very good set of rates to take advantage of."
Other available Isas include the Halifax four-year fixed-rate Isa saver paying 4.1% on a minimum opening deposit of £500 and First Direct's regular saver Isa, which is giving 7% on minimum monthly payments of £25, but you have to switch to a First Direct current account to be able to take advantage of the high rate.
Fixed rates
Yesterday, Egg launched a one-year fixed-rate bond paying 3% interest, but it is only available to existing Egg customers with a savings account. Hagger instead recommends West Bromwich building society's three-year bond, which pays 4% interest on a minimum £500 opening balance.
Regular savers can earn between 5% and 7% interest if they move their money to Abbey, although some of the more competitive accounts also require savers to open an investment plan with the bank.
The Abbey fixed rate monthly saver pays 5% for a year, as long as you make no withdrawals and pay in between £20 and £250 by a monthly standing order. The Super fixed rate monthly saver pays 7% on the same minimum and maximum monthly payments, but is only available if you take out a regular pension, investment or personal protection plan at the same time.
Hagger says: "Whilst the rate on the Super saver is competitive, I don't know if many people would feel comfortable with taking an investment plan at the moment, considering how volatile the markets are. You might make a good return on your savings, but lose it in the markets on your investment."
There are fewer catches with the monthly savings account on offer from Barclays, which pays 6% for 12 months. To get the rate you must pay between £20 and £250 each month; for any month that you make a withdrawal, the interest rate drops to 3.03%.
Bonus buys
In the absence of many savings accounts with good rates of interest, Black says it is worthwhile considering accounts which offer bonus rates: "You can take advantage of introductory bonuses, but diarise when the bonus ends so that, terms permitting, you can then move to another account."
ING Direct's Saving Account pays 4% on a minimum opening deposit of £1. The rate includes a 1.95% bonus for a year. Scarborough building society's Balance Builder account is also offering 4% on £1, but the rate will drop to 3.5% from February.
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