Better news for savers as rate war develops

Published on Friday 21 August 2009 18:55

SAVERS frustrated by the rock-bottom returns of recent months have been urged to take advantage of a rates war sparked by lenders anxious to bolster their retail funds.

The margins between the base rate of 0.5 per cent and the rates available on some savings products are at their widest in several years.

The gap between the Bank of England base rate and the top five easy-access savings accounts reached 2.69 per cent this week, while the margin between interest rates and the best fixed rate bonds available is almost 5 per cent. Such margins are rare and with inflation still low, savings deals that provide real above-inflation growth are easily attainable.

Inflation stabilised in July, it was revealed this week, confounding widespread predictions of a further fall. The consumer prices index (CPI) remained at 1.8 per cent, while the retail prices index (RPI) rose from –1.6 to –1.4 per cent. However, inflation is expected to resume its downward trend for the remainder of the year.

Kevin Mountford, head of banking at moneysupermarket. com, said: "The RPI is still in negative figures, which can only serve to help to protect people's hard-earned cash from the erosive effects of inflation. When you consider the increasing gap between the average easy-access savings rates and the base rate, now looks like a tempting time to put some cash aside."

He pointed out that a year ago, when RPI was 4.8 per cent, a standard rate taxpayer needed a savings rate of 6 per cent to break even.

"The average rate of the top five easy-access accounts is now 3.19 per cent, which might not sound impressive given the best rates were above 6 per cent this time last year, but it's 2.69 per cent above the base rate," mountford said.

Building societies are leading the way, most notably those finding it harder to secure finance on the wholesale market since their credit ratings were downgraded earlier this year. A number of lenders have to repay wholesale loans secured before the credit crunch began, putting pressure on them to raise money on the high street.

However, most savers remain in accounts paying little or nothing, with the average instant access account continuing to pay below the 0.5 per cent base rate.

So where are the top rates? As in the price war last year, the best deals are on offer to savers happy to lock their deposits away for a specific period. Here are the best buys at the time of writing:

Fixed-rate bonds

In March, four fixed-rate bonds paid more than 4 per cent. Now there are more than100, and the top fixed rate bond, from West Bromwich Building Society, pays 5.45 per cent, nearly 5 per cent above base rate, which is almost unprecedented. However, it requires the deposit to be tied up for five years. Andrew Hagger, head of communications at Moneynet, cautioned against taking a long-term fix.

"Investing in a term of more than three years may see you missing out as there is still a huge appetite from providers to secure retail funds," he said.

"The difference between two and three years is 0.56 per cent, but there is hardly any extra incentive to opt for a four-year deal, while five years still seems too far with the level of competition seen in this market."

Easy-access

Unusually, the best buys in this market are outstripping the top rates on products that require notice for withdrawal. Some of the best deals are from providers unable to compete in the fixed-rate bond market.

The top easy-access accounts tend to be online, with Egg offering 3.25 per cent. Coventry Building Society pays 3.3 per cent on its 1st Class Postal account.

Notice

Only six accounts pay more than 2 per cent above the base rate, with Turkish Bank (UK) leading the way at 3.02 per cent, a 60-day notice deal recently reduced by 0.50 per cent.

Isas

Unfortunately for taxpayers, the rates on tax-free cash individual savings accounts (Isas) remain relatively poor. This is because providers concentrate their Isa efforts on the small window around the end of the tax year, said Hagger. "They usually launch just before the end of the tax year and remain in place for a couple of months. Almost 20 key Isas were withdrawn by the first week of June."

There is a 3.26 per cent deal from Manchester Building Society and Newcastle offers 3 per cent but everything else is under 3 per cent.

Fixed-rate Isas are a different matter, with Leeds and Nationwide among a host of building societies offering more than 4 per cent, although most are for five year terms.

Isas paying even a half-decent rate are always worth considering because of their tax efficiency, with basic rate taxpayers effectively able to add 20 per cent to the savings rate, and higher rate payers 40 per cent.

Regular saver

Accounts requiring regular deposits between a minimum and maximum level and with restrictions on withdrawals have been the highest payers for some time.

Abbey pays 6 per cent on its regular saver, provided customers pay in between 20 and 250 a month by standing order. The offer only applies where a current account is also opened with Abbey and no withdrawals are permitted until the account is closed.

Bank of Scotland and Royal Bank of Scotland have similar accounts at 5 per cent.