Top deals for anxious savers

Interest rates are now at their lowest level for some 40 years, and the returns paid by banks and building societies have fallen dramatically over the past couple of years. Over the past 11 months alone, the Bank of England's base rate has fallen by a third from 6 to 4 per cent, including the latest 0.5 percentage point reduction announced on 8 November.

Following the latest cut, most banks and building societies have put their savings rates under review. Most will not announce lower rates until early December, though Saga, Virgin and Smile acted within hours of the base rate announcement, cutting their savings rates by the full 0.5 percentage points.

Successive rate cuts mean that the average interest rate payable on ?5,000 in an easy access, branch-based account is now just 0.68 per cent a year before tax, according to the savings market monitoring organisation, Moneyfacts. This is worth just 0.54 per cent after 20 per cent savings tax and 0.41 per cent after higher-rate tax.

Moreover, with inflation running at 1.7 per cent, basic-rate taxpayers need to earn at least 2.12 per cent a year before tax to ensure that their money retains its real value. For higher rate taxpayers the rate is 2.83 per cent.



This is achievable on easy access accounts as long as you pick the right providers. A string of top-paying telephone, postal and internet-based accounts (see pages 49-51) guarantee to pay rates linked to the Bank of England's base rate - either at 0.25 or 0.5 percentage points below. Following the latest reduction, these accounts will pay at least 3.5 per cent before tax.

Even after the reduction, Virgin Direct pays 3.5 per cent a year while Saga Secure Savings offers 3.75 per cent. Other competitive telephone-based accounts that are linked to base rates include Cheltenham & Gloucester's Tracker, Chelsea Building Society's Call-Direct Advantage, Coventry Building Society's CallSave Instant and Northern Rock's online tracker account, though none has yet adjusted their rates.

In addition, Intelligent Finance, Standard Life Bank and Sun Bank all offer postal and telephone-based accounts that do not come with a base rate guarantee but which do have a track record of paying consistently good rates of interest. In general, if you want a fixed-rate bond, banks and building societies give a better deal than National Savings. Two-year Index Linked Certificates from National Savings pay 1.5 per cent over inflation, tax-free. With inflation at 1.7 per cent, this works out at 3.2 per cent a year, the equivalent of 4.2 per cent a year before tax for a higher-rate payer and 3.58 per cent for a basic-rate payer.

In contrast, deals on three-year fixed-rate bonds from banks and building societies start at around 5 per cent before tax. Even if the rates fall by 0.5 percentage points to 4.5 per cent before tax, this is still better.

Guaranteed income bonds, on offer from insurance companies, are also worth considering. These pay out a fixed income over a fixed term and your capital is returned on maturity. But note that income is paid out after tax has been deducted and it cannot be reclaimed from the taxman.



Independent financial advisers Chartwell Investments and Baronworth say that on three-year bonds, rates are currently around 3.5 to 4 per cent after basic-rate tax, after taking into account the last base rate cut. Both advisers boost the income by repaying you some of the commission they earn from insurers for selling their bonds.

If you do not plan to put more than ?3,000 into stocks and shares Isas this tax year, then take out a tax-free cash mini-Isa. The top deals from leading providers offer 4.75 to 4.9 per cent a year with no costs and easy access to your money.

Finally, make sure you are earning the best rates possible on your old Tessa accounts - if not, you can transfer to a new provider. The best deals from institutions that accept Tessa transfers and give you easy access to your money currently come from Bank of Scotland (paying 4.9 to 5.01 per cent a year), HSBC (4.85 per cent) and the Nationwide and Coventry building societies (both pay 4.75 per cent).

The best Tessa-only Isa rates on easy access accounts include Bank of Scotland's offering of 4.86 per cent and Cheshire Building Society's account which pays 4.8 per cent. Barclays offers 4.9 per cent, HSBC pays 4.85 per cent and Investec offers 5.25 per cent, but with 30 days' notice on withdrawals.



Our select star buys

Easy access Alliance & Leicester, 4% for ?1, card account
High interest cheque IF, 3.7%, ?1, by phone; cahoot, 4.95% on ?1, online
Children's accounts Nationwide 5.2%, minimum ?1
Cash mini-Isas Smile 4.75%; Bank of Scotland 4.9%
Monthly income Abbey National, 5%, fixed for 3 years, minimum ?1,000
Postal/phone-based accounts IF, 4.55% on ?1; C&G 4.25% on ?100
Online accounts Northern Rock 4.9%; cahoot 5.05% both on ?1, easy access
Term accounts Abbey National, 5.15%, fixed for 3 years, minimum ?1,000
Notice accounts Yorkshire Building Society 4.05% on ?100, 30 days' notice
Regular savings Britannia 5.6%, minimum ?20 a month
Offshore accounts Derbyshire 4.5%, minimum ?2,500, easy access
All the rates in the survey are correct as at 12 November 2001

Our survey was compiled on 12 November and, with the exception of Virgin Direct, Saga and Smile, variable rates do not take into account the latest 0.5 percentage point cut in the Bank of England base rate. Some smaller societies - Newbury, Mansfield and Staffordshire - have yet to change their savings rates following the Bank of England base rate cuts on 18 September and 4 October. Their rates could fall by a whole percentage point.

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