Bumper returns for savers as banks battle for cash

Savers can benefit from the credit crunch, as banks try to improve their liquidity ratios by looking to cash depositors as a source of funds.

There are some excellent saving rates available, including those for tax-free cash ISAs. As always, though, check the small print when hunting for the best place to stash your cash. Short term bonus rates, interest penalties for early withdrawal and other restrictions (eg. existing customers only, the opening of another account in order to qualify) can turn seemingly attractive deals into savings dogs.

Monitor the rate

Many savings rates are significantly above the current Bank of England base rate which last week was reduced to 5%. But you need to be vigilant; several banks used February's quarter percentage point base rate cut as a smokescreen to slash up to half a percentage point off their savings accounts. Similar reductions could occur in coming weeks.

Which is the best savings account for you? Let Moneyextra guide you to the right choice with our comparison service.

Nonetheless, even after basic rate tax is deducted, many risk-free savings accounts are yielding substantially more than the rate of inflation as measured by the Retail Price Index.

The RPI is calculated to be rising at 4.1% per annum; this means that most savers need a gross return of more than 5.12% in order to preserve the real value of their money's purchasing power.

Currently, this is not difficult to achieve. The 'best buy' tables are crowded with interest rates at the 6% to 6.5% level. Just be aware of restrictions that may apply and the distorting effect of introductory bonuses on long term returns.

Searching for the right savings account? Take a look at Moneyextras guides to saving and investing.

For example, cash ISA accounts incorporating a bonus interest rate could be viewed as the most competitive and hassle-free way to save (remember, your earnings are tax free), but be prepared to review the deal after 12 months. Barclays' Tax Haven ISA returns 6.5%, but this will drop to 5.5% after a year. Alliance & Leicester intends to cut the rate on its Direct ISA Issue 4 from the present 6.25% to 5.25% in May 2009.

Meagre allowance increase

According to the Chancellor in his recent Budget speech, the Government is committed to encouraging more people to save, yet there was precious little evidence of any such encouragement in the actual Budget. The ISA allowance was not increased beyond what was announced in the 2007 Budget, a paltry £200.

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Stewart Farr
17 April 2008 © Moneyextra.com

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