2,385 savings accounts and they're nearly all rubbish!

It can be tough to find your way through the sea of mediocrity that is the savings market. Harvey Jones highlights the accounts you need.

What do you mean, you can’t get a decent return on your savings? Savers are spoiled for choice. They are lavished with savings options. They can’t move for deposit accounts.

The number of savings accounts has just hit an all-time high of 2,385, according to new research from Moneyfacts. Back in 1988, when it started collecting figures, there were just 203 accounts on the market. Now there are almost 12 times as many.

Which would be fantastic news, but for one small quibble. There is little value in banks and building societies offering us 2,385 savings accounts, if they’re nearly all rubbish.

Chinese arithmetic

There are 9 million bicycles in Beijing, Katie Melua once sang, having spent a busy afternoon counting them all. Presumably, most of those bicycles do the job they are designed to do, and are valued by their owners. Sadly, the same can’t be said for the vast majority of those 2,385 personal, business and offshore savings accounts.

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The average savings account now pays a miserly 0.77%, at a time when the consumer price index (CPI) stands at 4.5%, and the retail price index (which includes housing costs) stands at an even more punishing 5.2%.

A savings account that doesn’t pay interest is like having a bicycle that doesn’t have pedals and a chain. Katie Melua would probably have excluded such a vehicle from her tally.

The world is full of rubbish savings accounts

To beat the lower CPI rate of inflation, a 20% taxpayer needs to find a savings account paying 5.63% a year. How many of those 2,385 accounts do that?

A 40% higher rate taxpayer would need an even more demanding return of 7.5%. Are they likely to get it?

Fat chance.

The highly exclusive 5% club

If you use your tax-free cash Isa allowance, you can find two savings accounts with pedals, tyres and a chain - and a heavy lock. If you can bolt up your money for five years, the Birmingham Midshires 5 Year Fixed Rate ISA will pay you 5% a year on £500 and above, and it allows ISA transfers in. This cash ISA can only be managed by post, and if you withdraw any money during the five-year term, you will forfeit some interest.

Still, at least you will have earned some interest in the first place. And you will have beaten inflation, unless it rises above 5% during the five-year term, as it might.

Coventry Building Society also pays 5% on its five-year Fixed Rate ISA, provided you pay in your full £5,340 cash ISA allowance for the current financial year. Again, there are no early withdrawals, and you lose 120 days’ worth of interest if you close the account between now and 31 May 2016. This one doesn’t allow ISA transfers.

And that’s it. Those are the only two savings accounts I could find that help your money keep pace with inflation. Two accounts, out of 2,385. You don’t need a degree in applied mathematics to work out that this is a very poor strike rate.

Slow progress

To be fair, it isn’t easy for banks and building societies to offer a decent savings return, with the Bank of England holding base rates at 0.5% for the last 27 months.

In fact, you could argue that the best buy savings accounts are worryingly generous. Plenty of savings accounts pay above 3% (by plenty, I mean a couple of dozen, nothing like, say, 2,385). That’s worrying, because when base rates finally do start rising, as they must at some point, lenders are likely to narrow the margin they are offering above base rate.

If they do, savings rates could take even longer to improve.

Not completely rubbish

So let’s look at some of the better deals out there. First, ISAs. If you want instant access, the Northern Rock E IISA Issue 2 pays 2.8% on £1 and above, and the First Direct Cash eISA pays 2.75%.

If you’re happy taking out an account with an introductory bonus, AA Savings pays 3.35% of £500 and above. The bonus is 1.65%, and expires after 12 months. The Santander Flexible ISA 3 pays 3.3% on £1 and above. Its bonus makes up a whopping 2.8% of that figure, and again, lasts for just 12 months.

Which means you really should be switching to a new cash ISA after 12 months. Do you really want to do that?

Yet more choice!

If you have used up your cash ISA allowance, FirstSave offers a one-year fixed rate bond paying 3.5%, and the Post Office offers a one-year bond paying 3.35%.

The Nationwide MySave Online Plus pays a variable 3.05%, but this includes a 12-month introductory bonus of 1.51%, and you need a minimum £1,000.

If you want instant access without an introductory bonus, the Manchester Building Society Premier Instant Issue 10 pays 2.71% on £1,000 and above.

Or if you are happy to tie your money up for five years, the Birmingham Midshires Internet 5 Year Fixed Rate Bond pays 5.05% a year on £1 and above.

RIP, RPI

Finally, if inflation is your biggest concern, check out National Savings & Investments 5-Year Index-Linked Savings Certificates 48th Issue, which pay RPI plus 0.5%. The amount you ultimately get depends on what happens to inflation over the next five years. If prices fall, you might be disappointed. But if inflation continues to soar, these certificates could prove a great deal.

There are 2,385 savings accounts on the market. Most of them are absolute rubbish. But not all.

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