With the withdrawal of two leading savings accounts, it appears that banks aren't quite so keen on battling for savers' cash.
This article was first sent to Fools as part of our 'Summer Lolly' series.
Sir Winston Churchill once remarked, "Saving is a very fine thing. Especially when your parents have done it for you." Alas, saving can sometimes be a chore, largely because of these three problems:
1. Tax. If you're a basic-rate taxpayer, then you must hand over a fifth (20%) of your savings interest to the taxman. For higher-rate taxpayers, this tax bill doubles to 40% -- that's two pounds of every five!
2. Inflation. Inflation is the tendency for the cost of goods and services to rise over time, which undermines the future buying power of your savings. The government's preferred measure of inflation, the Consumer Prices Index (CPI), hit a record high of 3.8% in June. In other words, goods costing £100 a year ago now cost £103.80.
3. Interest rates. It's impossible to predict the future pattern of interest rates. Thus, it's very difficult for savers to decide whether to fix their savings interest rate today, or hang fire and hope for higher rates to come along.
With the CPI expected to rise above 4% soon, a basic-rate taxpayer will soon have to earn over 5% a year before tax in order to keep pace with inflation. For a higher-rate taxpayer, this `hurdle rate' is even steeper at 6.67%. However, no easy-access savings account pays such a high rate, with the table-topping Bradford & Bingley Internet Saver Issue 3 falling just short, paying 6.51% AER.
One way to beat inflation is to save inside a tax-free savings account known as a cash ISA. You can save up to £3,600 each tax year inside an ISA, which pays tax-free interest. Inside an ISA, freed of the burden of paying tax, your money can grow at, say, 6%+ a year, thus producing a `real' (after-inflation) return.
Another way to boost the future value of your money is to lock it away in order to secure super-high rates of interest. By depositing your money in a fixed-rate savings account, you can earn upwards of 7% a year before tax. However, in return for these high rates, you are unable to dip into your cash for months or years.
What's more, with table-topping fixed-rate savings deals being withdrawn at very short notice, it may make sense for you to tie up some of your savings right away. For example, last week, the two highest-paying fixed-rate savings accounts were withdrawn within weeks of being launched. Last Thursday, Birmingham Midshires pulled its 7.17% savings bond; Bank of Cyprus retired its 7.15% deal on Friday.
So, it seems that banks and building societies are no longer quite so keen to fight fiercely for savers' cash. If this trend continues, then it would mean the end of fixed-rate deals paying 7% or more. The good news is that this has yet to happen, as you can see from the following table of Best Buys:
Best Buy fixed-rate savings accounts
Account | Interest rate (% AER) | Fixed period | Minimum deposit (£) |
|---|---|---|---|
SAGA Internet Fixed Rate Savings (over-fifties only) | 7.12 | One year | 1 |
West Bromwich BS EBond 14 | 7.12 | To 31/07/10 | 1,000 |
FirstSave Fixed Rate Bond | 7.10 | One, two or three years | 1,000 |
Birmingham Midshires 13 Month Fixed Rate Bond | 7.07 | Thirteen months | 1,000 |
7.06 | One, two or three years | 1,000 |
Source: Fool.co.uk's independent, unbiased savings search engine, 21/07/08
Note that the SAGA account listed above is only available to savers aged fifty and over. Likewise, the Kaupthing Edge Fixed Term Deposit pays 7.15% AER on £1,000+ for a year, but is available only to existing Kaupthing Edge savers.
In summary, to boost your savings rate, become a tax-dodger by putting up to £3,600 into a cash ISA. If you still have a grand or more to spare, then try locking it away in a fixed-rate, fixed-term savings account.