Cash Clinic: Shop around to get best rate for savings over the short term

From what we've seen, it looks like some banks are offering good rates for 12 months but these then drop after that. Given that we're not keen on changing accounts every year, these aren't much good for us. Any advice would be greatly appreciated as neither of us is particularly up to speed when it comes to finances.

JA, Edinburgh

A Using a bank account for saving is most effective where access is required in the short term, i.e. less than five years. For longer-term savings, the relative safety of cash deposits must be weighed against the disappointing returns on offer.

The rate of inflation as measured by the headline consumer prices index (CPI) was 4 per cent in March, significantly outstripping the interest offered on savings accounts. The spending power of the cash being saved will, therefore, erode over time. This differential between interest rates and inflation normally means that other forms of investment should be considered for longer-term savings.

You have not mentioned when you plan to buy a house or how much you plan to save, but I am assuming that you will be using the sum saved within the next couple of years.

If you have not used your annual cash individual savings account (Isa) allowances, you should both do so before considering using a standard savings account. This would allow you to save up to 5,340 each in the current tax year. Allowing interest to accrue without deduction of income tax boosts returns by 25 per cent for basic rate taxpayers.When choosing a savings institution, make sure it's covered by the Financial Services Compensation Scheme (FSCS), which protects 100 per cent of the first 85,000 of each of your deposits per authorised institution in the unlikely event of it going bust. I understand your reticence to enter a cycle of moving accounts once a year or more frequently.

In your circumstances, I agree that you should select an institution that does not aim to provide the best rates for a limited period but instead aims to be consistently competitive.

There are plenty of deals available and interest rates will vary where not fixed. A potentially suitable cash Isa would be the Northern Rock E-ISA. This internet account currently pays 2.65 per cent AER and does not include a temporary bonus.

However, I would suggest that you use an internet comparison sites from time to time to ensure that your chosen account is still competitive or to find a better deal.• Stephen Hall is a wealth manager at Cornerstone Asset Management

lIf you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

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