A Savings Rate For Life

Bradford & Bingley has launched an easy access savings rate tracker. It's a nice idea but the rate being offered can easily be beaten elsewhere.

One thing that's always peeved savers is the way banks and building societies launch attractive new savings accounts and then, usually after a year or two, steadily reduce the interest rate so that it becomes less and less competitive. Another irritation is the way cuts in the Bank of England base rate are passed on in lightning quick time whereas any rise seems to take forever.

Bradford & Bingley has launched a new range of instant access accounts to combat both these gripes. Rate for Life is available through branches, online or via post and will pay 0.25% above the base rate for the life of the account with changes passed on within a month. A minimum of £1,000 is required to open one and a nominal rate is paid on any balance below this amount. Monthly and annual interest rate options are available and the maximum balance, for the serious savers among you, is £500,000.

Index trackers for investing have been around for yonks and interest rate trackers have proved very popular in the mortgage market since their introduction a few years back. Perhaps it's a surprise that it has taken someone so long to come up with the savings equivalent.

The main downside with Rate for Life, and it's rather an important one, is the rate of interest itself. Not that long ago 0.25% over the base rate would have looked pretty competitive. These days with banks clamouring for cash, no self-respecting saver would be seen dead earning interest of less than 6% and if you're prepared to put your money away for a year, 7% is easily obtainable.

Looking at The Fool's savings account search engine, 201 easy access accounts are currently listed. Rate for Life comes in at equal 50th at the moment and there are almost 30 accounts paying 6% or above. At around 1.5%, the difference between the base rate and the top paying easy access accounts is as great as it's been for severaly years. In a few years time the gap will probably narrow again but for the time being Rate for Life may struggle to attract that many new savers. 

What other options are there?

If you want a competitive rate for more than a couple of years without having to move your money around then you have various alternatives. Here's four to choose from:

Interest rate guarantees

A number of savings accounts, particularly those from new entrants to the market, offer guarantees related to the base rate. Icesave is offering 0.35% above the base rate until May 2011 and to match the base rate until 2013. ICICI is offering 0.3% above base rate until the end of 2011. Both companies currently pay over 6%, way above the minimum specified by the guarantee. It's also good to see that both have extended their guarantees since their accounts were launched.

Index-linked certificates

One of the best-value products from National Savings & Investments are its index-linked certificates. These are available for a fixed term of 3 or 5 years and pay a tax-free return linked to the Retail Price Index. The current issues pay RPI plus 1% so currently offer a potential return of 5.3% free of tax. Of course inflation could come down in future, although that obviously seems an unlikely prospect at the moment! You can put in up to £15,000 per issue.

High5

Investec offers a 3-month notice account that pays the average of the top five savings accounts as listed by Moneyfacts. This means it includes bonus rates and notice accounts but not any fixed-rate offers.  The rate is updated weekly and is currently 6.55%. As well as the notice period, the major downside for most savers is that you need £25,000 to open an account.

Keeping your options open

Although Rate for Life isn't that competitive at the moment, that may not always be the case. Looking back at old mortgage tracker rates provides an interesting example of how fast things can change. Less than two years ago, Woolwich was offering a lifetime tracker at base rate plus 0.19%. This looks exceptional value at the moment.

So one way to go could be to open a Rate for Life account now and then, should the rate become more attractive in future, you'll be able to transfer in money from elsewhere even if the product is no longer being offered to new customers.

To find the best rates on all types of savings accounts look no further than The Fool's  savings centre.

More: Who Is Winning The Savings Rate War?