The problems at Northern Rock have left many savers feeling shaky. Just where can you find a secure home for your savings?
Recent events at leading mortgage lender Northern Rock have left many British savers feeling distinctly shaky. (For more information, see Good And Bad News For Rock Savers.)
Can your cash be 100% safe?
If you feel that a well-known high-street bank isn't a `100% safe' home for your spare cash, then where is?
Actually, I'd argue that it's not possible for British savers to find a completely `safe' home for their money, that is, one with no chance of any loss whatsoever. After all, even sovereign governments sometimes default on their debts. This has happened frequently in Latin America and the Far East, and in Russia, where a huge default in 1998 created chaos in world financial markets.
However, our economy is the fifth-largest in the world, so the UK government enjoys a top-notch credit rating. Nevertheless, in the unlikely event that power was seized by, say, a revolutionary communist party, then Britain might default on its debts. This happened in the Russian Revolution ninety years ago, but is highly unlikely in Britain, as I'm sure you'll agree.
So, if absolute safety is what you're after, then the government's piggy bank, National Savings & Investment (NS&I) should be your first port of call. The good news is that you don't have to sacrifice high interest rates in return for this security, as NS&I has some cracking rates of interest...
Tax-free savings and good rates, too
In Six Safe Havens In A Storm, I mentioned that NS&I has an excellent cash ISA, which is a tax-free savings account which pays a table-topping rate of interest. If you haven't used your cash ISA allowance for the 2007/08 tax year, then you can deposit up to £3,000 into this account between now and 5 April 2008.
The minimum deposit into the NS&I Direct ISA is £1,000, and the interest rate is a tidy 6.30% AER. In other words, a lump sum of £3,000 would earn you tax-free interest of £189 over the next twelve months. This ISA also guarantees that its interest rate will be 0.55% above base rate until 05/04/08. Not bad for a no-risk savings account, agreed?
In addition, NS&I offers a range of tax-free Savings Certificates, as follows:
Index-linked Savings Certificates
Term | Issue | Annual interest rate | Minimum/maximum deposit (£) |
|---|---|---|---|
Three years | 15th | RPI plus 1.35% | 100/15,000 |
Five years | 42nd | RPI plus 1.35% | 100/15,000 |
The latest figure for the Retail Prices Index (RPI, one measure of inflation), released earlier today, showed the RPI rose to 4.1% last month. Thus, the above Certificates currently pay a tax-free 5.45% a year to savers, which equates to a before-tax return of 6.81% a year for basic-rate (20%) taxpayers or 9.08% a year for higher-rate (40%) taxpayers.
Fixed-interest Savings Certificates
Term | Issue | Annual interest rate | Minimum/maximum deposit (£) |
|---|---|---|---|
Two years | 37th | 3.95% AER | 100/15,000 |
Five years | 86th | 3.85% AER | 100/15,000 |
These Certificates pay the fixed, tax-free rates of interest shown above, if held for the full two or five years. For basic-rate taxpayers, these rates are worth a before-tax 4.94% a year and 4.81% respectively. For higher-rate taxpayers, the rates are 6.58% a year and 6.42% respectively.
On top of the £63,000 which you can invest in the above savings products, you can also invest from £100 to £30,000 in Premium Bonds. With average luck, a large investment in Premium Bonds should yield the equivalent of a tax-free 4% a year. This is worth 5% a year to basic-rate taxpayers and 6.67% to higher-rate taxpayers. However, if you are unlucky, then your return could be much lower (or even zero) over the course of an entire year, so tread carefully.
By the way, one great irony of the Northern Rock fiasco is that many savers who refuse to believe the Chancellor's promise to guarantee their deposits have switched large sums into NS&I. Come on, folks, either you trust the government's promise to repay or you don't! Which is it to be?
Finally, I've heard lots of talk about savers withdrawing their money in order to hide it under mattresses. There are two problems with this: mattresses don't pay any interest, and your money could easily be gone in a fire or burglary. So, banks are still safer than mattresses, any day!
More: Take a look at these great savings accounts, tax-free investments and children's accounts | Great News From The Credit Crunch! | The Perfect Savings Account