The best savings accounts for 2011

Looking for a new home for your savings this year? You've come to the right place.

Saving is something we all know we should be doing. But with savings rates remaining uninspiring and spare cash hard to come by, it’s a bit of a challenge to say the least.

And for those of us who are managing to find some spare cash to save, many of us are choosing to shun banks in favour of storing that cash at home. In fact, new research from the Financial Services Compensation Scheme (FSCS) has found that more than £7 billion in cash is lying around people’s homes.

Excluding the money in their wallets, the average amount people have at home is just over £280. While 37% of those questioned said they had less than £20 at home, 4% said they had more than £1,000 – including 1% who said they had more than £10,000 at home!

And the reason for this? Well, a lot of it boils down to the fact that interest rates on savings accounts at banks and building societies are simply rubbish!  

But while this comes as no surprise, if you know where to look, it is still possible to earn a competitive rate of interest on your savings, and surely this is better than receiving absolutely nothing?

So let’s take a look at some of the market-leading savings accounts available right now.

Easy access

For those of you who would prefer to have easy access to your savings, the table below shows the top five easy-access savings accounts on the market.

As you can see, the best paying easy access savings account is the Post Office Online Saver, offering an interest rate of 2.90%. You’ll only need £1 to open the account and you can access your funds penalty-free at any time.

Just bear in mind that the interest rate includes a 1.25% bonus for 12 months, so once that year is up, you may need to re-evaluate whether the account is still competitive and whether you need to move your funds elsewhere.

In fact, the majority of the savings accounts in the above table come with a bonus rate. The only account that doesn’t is the ING Direct Savings Account which pays an interest rate of 2.70%. This rate is guaranteed for the first year. So you can be reassured that the interest rate on the account won’t suddenly drop – as it could with the rest of the accounts in the table.

That said, once those 12 months are up, the interest rate does fall sharply to 0.50% - meaning you will need to find a new home for your savings.

Fixed rate accounts

But what if you’d prefer to lock up your savings for a set period and take advantage of a fixed interest rate? After all, the benefit of this is that the interest rate won’t change during the term of the bond. The downside is that you won’t be able to access your funds during that time.

If this does interest you, take a look at the following fixed rate bonds.  

One year bonds

If you’re hoping to tie up your funds for one year, the top paying one year fixed rate bond is the FirstSave 1 Year Fixed Rate Bond, offering an interest rate of 3.25%. You’ll need a minimum deposit of £1,000 and remember, you won’t be able to access your funds for 12 months.

Alternatively, the Skipton BS One Year E-Bond pays an interest rate of 3.05% and you’ll need a slightly smaller deposit of £500.

Both of these bonds can only be operated online.

Two year bonds

If you’re prepared to lock away your money for an additional year, the best two year fixed rate bond you’ll find right now is the Post Office Two Year Growth Bond. This pays an interest rate of 3.65% and you’ll need a minimum investment of £500.

Meanwhile, the Bank of Cyprus Two Year Bond offers a slightly lower rate of 3.60% and you’ll only need £1 to open the account.

Three year bonds

For those of you happy enough to plump for a three year fixed rate bond, your best option is the Post Office Three Year Growth Bond which pays 4%. For this account, you’ll need a minimum deposit of £500.

Alternatively, the Bank of Cyprus Three Year Bond pays £3.90% and you’ll only need £1 to open it.

Four and five year bonds

I’ve said this before and I’ll say it again. When it comes to tying up your funds for more than three years, I’m a little hesitant. This is simply because it’s likely interest rates will rise over the next few years. And as a result, if you take out a four or five year fixed rate bond today, it’s likely that although the interest rate might be competitive right now, it won’t be a few years later.

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However, if you’re prepared to take the risk, the State Bank of India Hi Return Fixed Deposit Account is paying 4.20% for four years (you’ll note that this isn’t significantly better than the 4% you could receive with a three year bond). You’ll need a minimum investment of £1,000 and you can only operate this account by post or in branch.

Alternatively, the Coventry BS Fixed Four Year Bond pays 4.15% and you’ll only need £1 to open the account. This account can be operated by post, in branch and by phone.

Moving onto five year bonds, the AA Five Year Fixed Rate Savings Account pays 4.50% and requires a minimum deposit of £1. Note that there are two bonds in this category – one which can only be operated online and one which can be operated by post.

Meanwhile, the State Bank of India Hi Return Fixed Deposit Account is also offering an interest rate of 4.50% and you’ll need a deposit of at least £1,000. This account can be operated in branch or by post.

As always with savings accounts, you need to get in quick if you want to get the best rates! But it’s certainly wiser to earn a little interest on your savings, rather than leave your cash lying around at home.

More: Save £2,011 in 2011! | The top 10 cash ISAs for 2011