How to find the best savings account for you

Best savings account rates have become something of a Holy Grail since the Bank of England cut its base rate by 0.25 percentage points in August. Higher rate taxpayers will need to be earning at least 4% gross on their savings just to stand still in real terms with inflation in August running at 2.4% as measured by the governments preferred Consumer Price Index.

Many banks and building societies took advantage of the first change in official interest rates in 12 months to drop their rates for savers. In many cases the cut comes on top of reductions earlier in the year. For instance, Universal Building Societys Direct 30 had already dropped from 4.2% to 3.95% in mid July, but has come down by another 0.4 percentage points to 3.55%, giving a total cut of 0.65%.

Lambeth Building Society's mini cash ISA came down from 5% to 4.4%, a whopping 0.6% off in one go - amounting to a reduction of £60 interest each year on an investment of £1,000. Savers with £5,000 invested in the Derbyshire Building Society's 180-day notice account saw a similar fall from 3.85 per cent to just 3.25 per cent.

Among the big high street names, Abbey, Alliance & Leicester and Sainsbury's have lopped half a point from their accounts, and Cheltenham & Gloucester, Halifax, Lloyds TSB and Portman have cut by up to 0.45%, as has internet bank Intelligent Finance. To give Alliance & Leicester its due, although it is bringing down the rate on some tiers of its Cash ISA by as much as half a point, it is writing to customers to invite them to transfer to its Direct ISA product, which gives them a better return.

Nevertheless, not all banks are being so helpful. Although savers with postal, telephone and internet accounts will receive written details of new rates, not all banks and building societies will bother to contact those with branch-based accounts, so savers will need to keep themselves informed by looking for notices in the press or in the branch itself.

Andrew Hagger from Moneyfacts says, "Consumers will assume their savings rates will have only been reduced by the amount of the base rate cut. Many institutions have published their new rates by way of a notice in the national press, but many people will have missed these and are probably blissfully unaware that they may now be receiving up to 0.6% less interest on their savings balances."

So what should savers be looking out for, to make sure they get the best rates for their hard-earned cash?

Lock in a fixed rate

Among fixed rate accounts, Kent Reliance Building Society offers 4.91% on just £100 for one year. Saffron Walden is paying 4.85% for a year with its Fixed Rate Savings Bond; and Chelsea Building Society is paying a one year fixed rate of 4.55% on a minimum of £1,000, or 4.6% fixed for two years.

Sit up and take notice

Fixed rates tend to be better than notice accounts, which seem to have fallen out of favour lately. If you don't want to set your cash aside for as long as a year but you can leave your money for three months, the best of the notice accounts are Northern Rock, paying 5.05%, including an introductory bonus on its 120-day account, Manchester Building Society paying the same on its 60-day account, and Dunfermline Building Society paying 4.85% on its 30 days notice tracker.

Look out for loyalty deals

Building societies often offer special deals to long-standing members. For instance, Portman members who have held a savings account for three years or more, and have had an average balance of £2,500 during the last 12 months, can get a rate, currently 5.25%, which is guaranteed to be 0.75 percentage points above the Bank of England base rate for one year. The minimum investment is £1,000, no withdrawals are allowed and the account cannot be closed during the first year. At the end of 12 months, the account automatically matures into the Matured Bond Plus account, which offers instant access.

Nationwide offers 5.15% on its Members Reward Bond for three years to members of three years' standing.

Hedge your bets with a tracker

The Co-operative Bank's High Interest Tracker is guaranteed to pay at least 0.25% below the Bank of England base rate until the end of 2008. It is currently paying 4.50% variable, with a guaranteed bonus of 0.50% applied after 12 months, provided a minimum balance of £5,000 is maintained. The account can be operated via branches, internet, telephone or post.

Consider regular savings

Norwich & Peterborough Building Society has just launched a new savings account paying a guaranteed fixed rate of 8% gross. The Gold Savings Account is available to anyone who already has or opens a Gold Current Account with N&P into which their salary is paid.

Cheshire Building Society has a similar account fixed at 8% for one year, with no withdrawals allowed. If the minimum monthly payment of £25 is not met, the rate drops to the society's Easy Saver rate. HSBC also offers 8% for regular savings.

Halifax's Regular Saver offers 7% gross fixed for 12 months for anyone saving between £25 and £250 each month.

For first-time buyers, Britannia has a special regular saver account, called Home Saver, paying 6.3% for savers intending to take out a Britannia home loan. The account has to be open for at least six months, with a minimum balance of £250 before applying the mortgage.

Net yourself a better rate

If you have a branch-based account, remember that you are likely to be able to get a better rate by moving over to a telephone, postal or internet account. If you are nervous about the internet, both Nationwide and Abbey have dedicated computer terminals within many branches so you can take advantage of internet rates from inside a branch, with a member of staff on hand to help you.

The top-paying rate at present is from ICICI, an Indian bank that has just recently entered the UK market: 5.4%. The bank is regulated by the Financial Services Authority, so you need not fear an unfamiliar brand. However, if you feel more comfortable with a household name, First Direct offers 5% but won't pay interest in any month you make a withdrawal. Market Harborough's onthedot account, paying 4.75%, is guaranteed to stay 0.25% above the Bank of England base rate until June 30, 2006.

Act on your age

Natonwide's Monthly Income 65+ account pays 4.75% AER and guarantees to match base rate until January 31, 2011.

Other accounts for older savers come from Northern Rock, West Bromwich, Yorkshire, Coventry, Skipton, Scarborough, Earl Shilton, Hinckley & Rugby, Marsden and Newbury building societies. But watch out, as several of these deals can be bettered by, for instance, switching to an internet account.

At the other end of the age scale, the Halifax Children's Regular Saver pays 10% to anyone saving on behalf of an under-16 and putting aside between £10 and £100 every month, No withdrawals are permitted, but the account can be closed at any time.

The Harpenden Building Society pays 5.15% gross on its 18 Club account, which is guaranteed to always be the society's best paying account. No withdrawals are allowed until the young person reaches the age of 18.

Other good rates for children include Saffron Waldens 5%; Chelsea Building Society's Ready Steady Save at 4.85%, Melton Mowbray Building Society's 0216 Savers at 4.82% (over £250) and Nationwide Building Society's Smart Account paying 4.7%.

Know your ISA

If you are a taxpayer, you will get the best rate by putting your money in a tax-free individual savings account - a Cash ISA. The top rate at present comes from Portman building society 25-days' notice account, at 5.25% on £3,000 including an introductory bonus followed by Tipton & Coseley's 30-day notice account at 5.15%, including bonus, and Kent Reliance, paying 4.96% on just £1 with instant access.

(All rates correct at time of writing)

13 September 2005 © Moneyextra.com

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