It's now much easier to protect your savings from the effects of rising prices.
The financial crisis has hit savers hard. In an attempt to stop the UK economy falling through the floor, the Bank of England has kept its base rate at 0.5%. As a result many savings accounts have been paying pathetically low interest rates, often below 1%.
To make matters worse, inflation has been rising pretty quickly for most of the last two years. Indeed inflation went as high as 5.2% last September and that’s meant that the inflation-adjusted or ‘real’ value of most savers’ nest eggs has been falling.
If your savings are earning 2% interest and inflation is 5%, the value of your savings is falling by 3% a year in ‘real’ terms. In other words, a £1,000 savings pot will effectively only be worth £970 a year later.
And that’s before you even think about tax! Savings interest is liable for income tax, so if you’re a basic-rate taxpayer and your money is earning 3% in a savings account, you’ll only receive 2.4% once income tax has been deducted.
Good news
But thankfully things are getting better for savers. That’s because inflation has been falling in the last few months and dropped to 2.4% in June. So a basic-rate taxpayer now only needs to find an account paying 3% to keep up with inflation. A higher-rate taxpayer needs an account paying 4%.
After-tax returns on savings accounts for different rates of income tax
|
Tax rate |
Before tax savings interest rate |
Interest rate after tax |
|
20% (basic rate) |
3% |
2.4% |
|
40% (higher rate) |
4% |
2.4% |
|
50% |
5% |
2.4% |
Now that inflation has fallen, there are now 11 instant access savings accounts on the market that at the very least match inflation.
Here are the first 11:
|
Account |
Interest rate (AER) |
Minimum deposit |
Access |
Notes |
|
ING Direct Savings Account` |
3.24% |
£1 |
Online and phone |
2.69% bonus for 12 months |
|
West Brom BS Direct Bonus Account 4 |
3.22% |
£10,000 |
Phone and post |
1.71% bonus until 31/08/13 |
|
Santander eSaver Issue 5 |
3.2% |
£1 |
Online and phone |
2.7% bonus for 12 months |
|
Kent Reliance Direct Savings |
3.2% |
£1,000 |
Post |
- |
|
AA Internet Extra (Issue 7) |
3.07% |
£1 |
Online |
2.1% bonus for 12 months |
|
3.06% |
£1,000 |
Online |
1.52% for 12 months |
|
|
GE Bonus Saver Issue 2 |
3.06% |
£500 |
Online |
1.56% bonus for 12 months |
|
Post Office Online Saver Issue 6 |
3.01% |
£1 |
Online |
1.36% bonus for 12 months |
|
Allied Irish Bank Easy Access Reward account |
3% |
£1 |
Phone and post |
1.5% bonus for 5 years |
|
Coventry BS Family Saver |
3% |
£1 |
Online |
1% bonus for 12 months |
|
Kent Reliance High Balance Easy Access |
3% |
£25,000 |
Branch |
|
The top account is the ING Direct Savings Account. You can manage this account by phone and online, and it pays a cracking 3.24% interest rate.
The rate includes a 2.69% bonus that is fixed for 12 months. So, on the downside, your interest rate will almost certainly tumble after a year. But at least you get the guarantee that your interest rate can’t be cut below 2.69% for the first year you have the account.
Cash ISAs
Of course, it’s easier to beat inflation if you don’t have to pay any tax on your interest at all. And with a Cash ISA, your savings are completely protected from income tax.
You’ll normally get the highest interest rate if you go for a fixed rate Cash ISA, and there are now 76 fixed rate ISAs that offer an inflation-beating return, according to MoneySupermarket.
So here are the top-paying Cash ISAs on the market right now over different time periods:
|
Account |
Interest rate (AER) |
Notice/Term |
Minimum deposit |
Notes |
|
4.25% |
5 year bond |
£500 |
|
|
|
4.1% |
4 year bond |
£500 |
|
|
|
Santander 2 Year Fixed Rate Major ISA |
4% |
2 year bond |
£1 |
|
|
Santander Direct ISA (Issue 9) |
3.3% |
Instant access |
£2500 |
Includes 2.8% bonus for first 12 months |
|
Coventry BS 60 Day Notice ISA |
3.25% |
60 days |
£1 |
|
So all in all, things are looking up for savers. Let’s just hope that inflation stays low for years to come. And, heck, one day the Bank of England might raise its base rate which should give a further boost to savers. Just don’t expect that rate rise until 2014 at the earliest.