Inflation hits 5.6% - get the best new savings accounts quick!
As inflation soars, Robert Powell takes a look at how to protect your savings...
"Raise the base rate or the pig gets it!" were the cries outside the Bank of England as the Save Our Savers campaign demonstrated against the historically low bank rate this month.
In the end, Bertie – the group’s papier-mâché porcine pal – was executed with a mallet. Perhaps he was meant to be a symbol of the ravaging impact that inflation, spurred on by the low base rate, is having on Britain’s savers?
If so, poor old Bertie will have been spinning in his grave as the inflation figures for September were announced earlier this week. The rate of Consumer Prices Index (CPI) inflation is now 5.2%, up from 4.5% In August; the highest rate since September 2008.
The Retail Prices Index (RPI) also rose to 5.6% - the highest rate in 20 years.
But how can a stretched British public protect their savings from these soaring rates of price rises?
Well, getting hold of a decent savings account is a good start.
Fixed rate ISAs
Cash ISAs should be your first port of call if you’re after a savings account, as they pay interest completely tax-free. You can deposit up to £5,340 of new funds into a cash ISA every financial year. However this deposit has to be made into one account, as you can’t split your allowance between ISAs in the same tax year.
So if you have used up part of your allowance since April, but now fancy a new ISA – you’ll need to get hold of an account that allows transfers in. From here, you can shift over your existing balance to the new account (along with any balances from previous tax years, if you want to).
But whatever you do, don’t withdraw the cash from the ISA when making the transfer, as this will mean it loses its tax-free wrapper. Get a transfer form from your new provider instead.
Here are the best rates around at the moment for fixed term ISAs:
|
ISA |
Term |
Rate (% AER) |
Minimum |
Transfers allowed? |
|
To 31.12.12 |
3.30% |
£100 |
Yes |
|
|
To 31.12.12 |
3.30% |
£100 |
Yes |
|
|
2 years |
3.50% |
£500 |
Yes |
|
|
To 06/12/13 |
3.70% |
£1,000 |
Yes (have to transfer money in from another provider’s ISA) |
|
|
3 years |
3.80% |
£500 |
Yes |
|
|
4 years |
4.30% |
£500 |
Yes |
|
|
5 years |
4.40% |
£500 |
Yes |
Source: lovemoney.com ISA centre
Predictably the best interest rates are available to those prepared to lock their cash away for the longest period. Halifax’s four and five year deals come out on top for long-term ISAs offering 4.30% and 4.40% respectively.
However you should always think hard before stashing your cash away for a substantial amount of time, especially in the current climate. As we all know, the base rate is still at a record low of 0.5%. But it won’t stay this way forever. And when the Bank of England does eventually up its rate, the ISA market should take a shot in the arm, and become more competitive. The last thing you want when this does happen is to be stuck with a (relatively) paltry interest rate on a long term fixed ISA.
Instant access ISAs
If you fancy a bit more flexibility built into your account, here are the top instant access ISAs currently around:
|
ISA |
Rate (% AER) |
Bonus |
Minimum |
Transfers allowed? |
|
3.00% |
Rate guaranteed for 12 months |
£1 |
No |
|
|
2.80% |
1% for 12 months |
£1 |
Yes |
|
|
2.75% |
1.75% for 12 months |
£1,000 |
Yes |
Source: lovemoney.com ISA centre
As you can see, if you plump for the ING Direct account you’ll be able to earn 3.00% and still get access to your nest egg. However, when you take out any easy-access ISA (or bond) you should always watch out for any bonus tacked onto the main interest rate.
In the table above, both the Principality and Nationwide accounts come packaged with such a bonus that drops away after a month, leaving you with a rubbish interest rate. The ING Direct account is identical in all but words; here the ISA reverts to the provider’s standard rate: 1.00%, after 12 months. So if you opt for any of these three deals, you’ll need to switch accounts after a year.
But if you have already used up your entire ISA allowance for this year – fear not; you can still get hold of a regular bond.
Savings bonds
Here are the best instant access and short term savings bonds currently around:
|
Account |
Rate (% AER) |
Term |
Minimum |
Need to know |
|
3.12% |
Instant access (one penalty free withdrawal per year) |
£1,000 |
1.58% bonus rate for 12 months |
|
|
3.10% |
Instant access |
£1 |
2.60% bonus rate for 12 months |
|
|
3.01% |
Instant access |
£1 |
1.36% bonus rate for 12 months |
|
|
3.40% |
1 year |
£1,000 |
|
|
|
3.40% |
1 year |
£5,000 |
Interest must be paid into a NatWest curr acc |
|
|
3.80% |
2 years |
£5,000 |
Interest must be paid into a NatWest curr acc |
|
|
3.50% |
2 years |
£500 |
Could qualify for Halifax savers prize draw |
Source: lovemoney.com savings centre
Again, alarm bells should be ringing when you set eyes on the instant access accounts in the table above: as all three come packaged with a bonus. Santander’s eSaver has a huge 2.60% 12 month rate tacked onto the headline 3.10% rate.
The NatWest Preferential Fixed Bond emerges as the best medium term account, offering 3.80% if you lock away your savings for two years. However both of the NatWest deals in the table above require you to hold a current account with the provider that the savings interest can be paid into. Head over to our current account comparison centre for full details of NatWest’s debit deal offerings.
Onto longer term deals...
Longer term deals
Here are the options available to savers prepared to lock away their money for three years or more:
|
Account |
Rate (% AER) |
Term |
Minimum |
|
4.15% |
3 years |
£1,000 |
|
|
3.75% |
3 years |
£500 |
|
|
4.55% |
5 years |
£1,000 |
|
|
4.50% |
5 years |
£1 |
Source: lovemoney.com savings centre
The best deals in the long term savings market come from Vanquis Bank’s two new deals; a three year and five year high yield bond. These deals pay 4.15% and 4.50% respectively. But again, think hard before you go locking your cash away for five years as the early exit fees for these accounts are very pricey.
Finally, for an innovative way to protect your money from rising prices, without even going near a bank, read Savers: Earn 11% on your money.
More: Compare bonds and ISAs with lovemoney.com | Scary news for savers | New savings accounts that beat inflation
Most Recent
Comments
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I think you can control risk to some extent by be diverse. It isn't a matter of shares or Zopa, but perhaps both. I think one option is to simply wait and hope NS&I launch a new index linked certificate next April. That will match inflation and be as safe as the government. Many shares appear to be cheap now, assuming that we come out of recession as we have done in the past. Past performance is no guarantee of future performance however. At the moment, I like cash, gold, peer to peer lending with Zopa and shares but I am looking at corporate bonds too. I believe most households that do have saving have an average of £2,500 including next years holiday money and so it can be hard to be diverse. Many people have debts above £10,000 and then it's hard to survive in the current climate. I have been writing blogs to encourage people to be thrifty and frugal. One year of being thrifty and frugal can lead to decades of less worry, enough money and being debt free.
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There are also trackers that follow the indexes such as the FTSE 100 or All Share and can be wrapped in an ISA. Not so risky as individual shares and a better bet if you are just starting out. I have a tracker with HSBC that tracks the FTSE and I drip feed money in on a monthly basis and the annual charge is low at 0.25%. You can also transfer money from existing cash ISAs. I believe Vanguard also do a tracker and the charge is slightly less!
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Zopa or Shares? They are completly different beasts. With Zopa and savings accounts you are buying debt and with shares you are buying equity. With normal bank debt you won't lose capital (subject to limits) but, as you point out, returns are negative after inflation . I'm no expert on peer to peer lending but returns after bad debt are not guaranteed and there are less guarantees. With shares you become part owners of a company and they are considered more risky as you could lose all your capital. In practice this is unlikely if you invest in funds that have a large number of holdings, but the capital value will vary. Much depends on your attitude to risk and that is a very personal thing. It will also depend on how quickly you may need access to your capital. If you need income more than access to capital you MAY be better off investing in corporate bonds, fixed income preference shares or high yielding equities, especially if the equities are well established blue chip companies that are likely to survive any downturn. As with all investing it's a question of risk against reward and depends on your personal circumstances. Personally I hold some cash , some bank fixed income preference shares, various funds including those that invest in Asia, emerging markets and infrastructure together with 8 individual blue chip UK shares. Your needs and attitude to risk may vary greatly from mine. Bottom line is there's no one answer that suits all. That's the beauty or curse of investing.
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06 November 2011